[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
STRENGTHENING THE MULTIEMPLOYER
PENSION SYSTEM: WHAT REFORMS
SHOULD POLICYMAKERS CONSIDER?
=======================================================================
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, JUNE 12, 2013
__________
Serial No. 113-21
__________
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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
Juliane Sullivan, 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 June 12, 2013.................................... 1
Statement of Members:
Andrews, Hon. Robert E., ranking member, Subcommittee on
Health, Employment, Labor, and Pensions.................... 5
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor, and Pensions............................ 1
Prepared statement of.................................... 3
Statement of Witnesses:
Dean, Eric, general secretary, International Association of
Bridge, Structural, Ornamental and Reinforcing Iron Workers 12
Prepared statement of.................................... 14
DeFrehn, Randy G., executive director, National Coordinating
Committee for Multiemployer Plans (NCCMP).................. 6
Prepared statement of.................................... 8
Ghilarducci, Teresa, Bernard and Irene L. Schwartz professor
of economics, the New School for Social Research........... 19
Prepared statement of.................................... 21
Murphy, Michele, executive vice president, human resources
and corporate communications, SUPERVALU Inc................ 24
Prepared statement of.................................... 26
Additional Submissions:
Mr. Andrews:
American Association of Retired Persons (AARP), prepared
statement of........................................... 47
The Pension Rights Center (PRC), prepared statement of... 53
STRENGTHENING THE MULTIEMPLOYER PENSION SYSTEM: WHAT REFORMS
SHOULD POLICYMAKERS CONSIDER?
----------
Wednesday, June 12, 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 10:06 a.m., in
room 2175, Rayburn House Office Building, Hon. David P. Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, Wilson, DesJarlais, Bucshon,
Roby, Heck, Brooks, Andrews, Scott, Tierney, Courtney, Polis,
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; Owen Caine,
Legislative Assistant; Ed Gilroy, Director of Workforce Policy;
Benjamin Hoog, Senior Legislative Assistant; Nancy Locke, Chief
Clerk; Brian Newell, Deputy Communications Director; Krisann
Pearce, General Counsel; Todd Spangler, Senior Health Policy
Advisor; Alissa Strawcutter, Deputy Clerk; Aaron Albright,
Minority Communications Director for Labor; Tylease Alli,
Minority Clerk/Intern and Fellow Coordinator; John D'Elia,
Minority Labor Policy Associate; Daniel Foster, Minority
Fellow, Labor; Eunice Ikene, Minority Staff Assistant; Brian
Levin, Minority Deputy Press Secretary/New Media Coordinator;
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, everyone. As the title of the hearing
suggests, today we will begin to review possible reforms to the
nation's multiemployer pension system.
In 2014 provisions of the Pension Protection Act affecting
multiemployer pensions are set to expire. For more than a year
the committee has looked closely at the challenges facing this
pension system, which is relied upon by more than 10 million
individuals.
Academics, employers, trustees, government officials, union
representatives have helped us identify the strengths and
weaknesses in the current federal policies. We have learned an
aging workforce, fewer contributing employers, and a
persistently weak economy have significant challenges plaguing
the system.
We have also learned that if these pensions are not placed
on a more sound financial footing, workers, retirees, and
taxpayers nationwide will be harmed. Two graphics illustrate
this point.
The first graphic shows the deficit the Pension Benefit
Guaranty Corporation expects its multiemployer insurance
program will accumulate in less than 10 years--a deficit that
is projected to climb from $5.2 billion to more than $26
billion. I don't believe anyone can look at this chart and deny
a serious problem exists.
While the PBGC is not funded by the U.S. Treasury,
insolvency of this program would raise tremendous public
pressure for a taxpayer bailout of the agency. We cannot allow
this to happen.
The second graphic illustrates the stakes in this debate.
Nearly 5 million individuals participate in a multiemployer
pension plan that, because of its funding condition, is in
either yellow, orange, or red zone status.
This means nearly half of all individuals in the
multiemployer pension system are in a plan without a clean
financial bill of health. The insecurity this creates for
workers, retirees, and families and the risk posed to the
entire system cannot be ignored.
Broad, structural changes are needed to address this
crisis, which leads us to today's hearing and the focus of our
efforts. Congress and the administration have a responsibility
to enact reforms that will benefit workers and retirees while
protecting American taxpayers.
Our witnesses today will help us begin that process by
providing an overview of proposed reforms.
We will also have an opportunity to discuss ideas recently
released by the Retirement Security Review Commission of the
National Coordinating Committee for Multiemployer Plans. We are
fortunate to have the executive director of the NCCMP with us
today to outline his organization's plan.
I will leave the details to Mr. DeFrehn. However, I would
like to offer two observations about the NCCMP's proposal.
First, it is abundantly clear that solving this problem
will require tough choices and sacrifice. Second, the NCCMP has
demonstrated that common ground can be found when all sides
work together in good faith and on behalf of the greater good.
Congress has a window of opportunity to improve the
multiemployer pension system. I know there will be differences,
but I hope in the weeks and months ahead we can mirror the same
spirit of cooperation demonstrated by this organization.
I look forward to today's discussion and the vital work
that lies ahead.
I know Mr. Andrews is on his way, and I will sort of defer.
I will go ahead and introduce you all, and then if Mr.
Andrews arrives then we will let him make the opening
statement.
Pursuant to rule 7(c), all members will be permitted to
submit written statements to be included in the permanent
hearing record. And without objection, the hearing record will
remain open for 14 days to allow such statements and other
extraneous material referenced during the hearing to be
submitted for the official hearing record.
It is now my pleasure to introduce our distinguished panel
of witnesses.
As I have mentioned, Mr. Randy DeFrehn is the executive
director of the National Coordinating Committee for
Multiemployer Plans in Washington, D.C. He has served as a
member of the U.S. Department of Labor's ERISA Advisory
Council. He holds a master's degree in industrial relations
from St. Francis College, where he also taught compensation,
benefits, and administration.
Mr. Eric Dean is the general secretary of the International
Association of Bridge, Structural, Ornamental, and Reinforcing
Iron Workers in Washington, D.C. In 2005 he was elected as
president of Chicago District Council of Ironworkers and in
2013 was appointed to serve as the national general secretary.
Welcome, Mr. Dean.
And Dr. Teresa--oh, this is going to hurt me here--
Ghilarducci--did I get that right? And I apologize for
butchering your name--is the Bernard L. and Irene Schwartz
chair of economic policy analysis at the New School of Social
Research in New York, New York. She was twice appointed to the
Pension Benefit Guaranty Corporation's advisory board and
received her Ph.D. in economics from the University of
California Berkeley.
And welcome.
Ms. Michele Murphy is the executive vice president of H.R.
and corporate communications for SUPERVALU, Inc. in Eden
Prairie, Minnesota. In this capacity she oversees all human
resource functions for SUPERVALU's 35,000 employees. She holds
a B.S. in economics from St. Vincent's College and a J.D. from
University of Pittsburg, where she graduated summa cum laude.
And before you begin your testimony I will now yield to Mr.
Andrews?
[The statement of Chairman Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman,
Subcommittee on Health, Employment, Labor and Pensions
Good morning, everyone. As the title of the hearing suggests, today
we will begin to review possible reforms to the nation's multiemployer
pension system. In 2014 provisions in the Pension Protection Act
affecting multiemployer pensions are set to expire. For more than a
year the committee has looked closely at the challenges facing this
pension system, which is relied upon by more than 10 million
individuals.
Academics, employers, trustees, government officials, and union
representatives have helped us identify the strengths and weaknesses in
current federal policies. We have learned an aging workforce, fewer
contributing employers, and a persistently weak economy are significant
challenges plaguing the system. We have also learned that if these
pensions are not placed on more sound financial footing, workers,
retirees, and taxpayers nationwide will be harmed. Two graphics
illustrate this point.
The first graphic shows the deficit the Pension Benefit Guaranty
Corporation expects its multiemployer insurance program will accumulate
in less than 10 years--a deficit that is projected to climb from $5.2
billion to more than $26 billion. I don't believe anyone can look at
this chart and deny a serious problem exists. While PBGC is not funded
by the U.S. Treasury, insolvency of this program would raise tremendous
public pressure for a taxpayer bailout of the agency. We cannot allow
this to happen.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The second graphic illustrates the stakes in this debate. Nearly
five million individuals participate in a multiemployer pension plan
that, because of its funding condition, is in either yellow, orange, or
red zone status. This means nearly half of all individuals in the
multiemployer pension system are in a plan without a clean financial
bill of health. The insecurity this creates for workers, retirees, and
families and the risk posed to the entire system cannot be ignored.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Broad, structural changes are needed to address this crisis, which
leads us to today's hearing and the focus of our future efforts.
Congress and the administration have a responsibility to enact reforms
that will benefit workers and retirees, while protecting American
taxpayers. Our witnesses today will help us begin that process by
providing an overview of proposed reforms.
We will also have an opportunity to discuss ideas recently released
by the Retirement Security Review Commission of the National
Coordinating Committee for Multiemployer Plans. We are fortunate to
have the executive director of NCCMP with us today to outline his
organization's reform plan. I will leave the details to Mr. DeFrehn,
however, I'd like to offer two observations about NCCMP's proposal.
First, it is abundantly clear that solving this problem will
require tough choices and sacrifice. Second, NCCMP has demonstrated
that common ground can be found when all sides work together in good
faith and on behalf of the greater good. Congress has a window of
opportunity to improve the multiemployer pension system. I know there
will be differences, but I hope in the weeks and months ahead we can
mirror the same spirit of cooperation demonstrated by this
organization. I look forward to today's discussion and the vital work
that lies ahead.
I will now recognize the ranking member of the subcommittee, my
colleague Representative Rob Andrews, for his opening remarks.
______
Mr. Andrews. Well, I apologize for my tardiness this
morning, Chairman, colleagues, and witnesses. Ijust want to
compliment the chairman on the way he has conducted this
inquiry.
I think there is broad consensus that we want to protect
pensioners so their pensions are sound, that we want to help
small businesses compete fairly in the marketplace so they can
prosper, and we want to protect taxpayers so we minimize the
risk to taxpayers. I think that your leadership on this issue
has been a pleasure and exemplary and I look forward to this
morning's hearing and working with you as we solve this problem
together.
Thank you.
Chairman Roe. I thank the gentleman for yielding.
Before I recognize you to provide your testimony let me
briefly explain our lighting system. You have 5 minutes to
present your testimony.
When you begin, the light in front of you will turn green;
when 1 minute is left the light will turn amber, at which time
when your time is expired it will turn red. At that point I
will ask you to wrap up your remarks as best you are able.
After everyone has testified members will each have 5 minutes
to ask questions.
I would like to thank the witnesses this morning, and I
will begin with Mr. DeFrehn?
STATEMENT OF RANDY DEFREHN, EXECUTIVE DIRECTOR, NATIONAL
COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS
Mr. DeFrehn. Chairman Roe, Ranking Member Andrews, members
of the committee, it is an honor to be here with you this
morning to discuss this important topic. My name is Randy
DeFrehn; I am the executive director of the National
Coordinating Committee for Multiemployer Plans.
Generally speaking, the majority of multiemployer plans
have been slowly but surely recovering from the economic shocks
that occurred in the last 10 years. More than 60 percent of
those, as your graphic demonstrated, are back in the green
zone.
I last appeared before your committee at a hearing titled
``Examining the Challenges of the PBGC and Defined Benefit
Pension Plans'' on Groundhog Day, February 2, 2012. Seems that
the reference to Groundhog Day is appropriate, given the number
of times this issue has come up over the last decade.
And we recall at that time your very explicit statements
that no government bailout should be expected. Therefore, we
have proceeded on that basis to craft very specific private
sector solutions that, if enacted, will go far towards
addressing those challenges.
It is unnecessary to dwell on the specifics of those
challenges other than to note that the passage of time has only
sharpened the focus on the need for attention. As your PBGC
slide demonstrated, the increase in their liabilities are
threatening the long-term ability for that agency to provide
its benefits, and the GAO further reported that if the
multiemployer fund is exhausted, participants relying on the
guarantee would receive only a small fraction of the benefit
provided under that formula.
These predictions only underscore the need for bold and
decisive congressional action sooner rather than later. We
commend the committee for having spent the necessary time to
evaluate the need for prompt attention and strengthen the
system and for focusing today's hearing on solutions to achieve
that end.
I previously reported to you on our creation of the
Retirement Security Review Commission. It is comprised of
representatives from over 40 labor and management groups from
industries across the multiemployer community.
Over a period of approximately 18 months the group
evaluated their collective experience with current laws and
regulations in the course of developing a comprehensive set of
recommendations for reforms to strengthen the system. These
recommendations fall into three broad categories--preservation,
remediation, and innovation--which are described in a report
titled, ``Solutions Not Bailouts: A Comprehensive Plan for
Business and Labor to Safeguard Multiemployer Retirement
Security, Protect Taxpayers, and Spur Economic Development.''
They include recommendations for technical corrections to
the Pension Protection Act to preserve and strengthen those
plans that are recovering from the 2008 recession,
recommendations for remedial measures to address the problems
of the approximately 90 to 150 plans which are projected to
become insolvent, and recommendations that encourage the
creation of innovative alternative designs to eliminate many of
the current incentives for employers to exit the system.
In the limited time available I would like to comment
briefly on the commission's process and then make a remark
specifically on the deeply troubled plans, which appear to be
somewhat misunderstood by some.
With the sunset of the multiemployer provisions of the PPA
at the end of 2014, the reemergence of significant unfunded
liabilities as a result of the Great Recession, and expanded
disclosures required by the financial services community, the
time has come to revisit the labyrinth of existing rules which
have evolved over the past 40 years in order to restore
stability to the system. The commission served as a vehicle to
facilitate the development of a consensus among stakeholders
across the multiemployer community on elements of funding
reform that are necessary to achieve that stability.
Because multiemployer plans are the product of collective
bargaining, any proposal for reform requires the active
engagement of both labor and management. The composition of the
commission reflected a broad cross-section of both
constituencies, while the diversity of interests and
perspectives ensured that the proposals for reform were
representative of the wide variation among plans and
participants. Despite their differences, the commission members
remained focused throughout the process, conscientiously
engaging in a cooperative spirit of problem solving that was
both respectful and often vociferous as they worked towards a
consensus on a wide range of issues.
A comment on the remediation section of our proposal: Under
current law, the anti-cutback rules require plans that are
headed for insolvency--the deeply troubled plans--to pay
accrued benefits at the current levels until their assets are
depleted. At that time, the fiduciaries are required to reduce
benefits to the statutory guarantee level, levels which, by the
PBGC's own estimates, are unsustainable for the future and are
likely to be subject to even more draconian reductions.
Plans currently have no authority to intervene at an
earlier point, even if the plan could remain solvent while
preserving benefits above the statutory guarantee levels.
If I might beg your indulgence for about another minute?
As a result, many plans will needlessly cease to provide
future accruals for active workers, employers will be assessed
withdrawal liability, and the liability to the PBGC will go up,
possibly exposing taxpayers to unanticipated liabilities.
For many plans these unwelcome outcomes can and should be
avoided by accelerating the timing of their existing
obligations to permit intervention while the plan's solvency
may still be preserved rather than waiting until the plan has
depleted its assets. Provided that after adoption of such
measures the plan is expected to remain solvent, benefits may
be reduced only to the extent necessary to achieve continued
solvency but in no event below 110 percent of the stated
statutory guarantee levels under the current PBGC Multiemployer
Guaranty Program.
Plan fiduciaries are required to design any changes in an
equitable manner across all participant classes. The PBGC
certifies that the plan fiduciaries have exercised due
diligence in making such determinations and designing the plan.
And any subsequent benefit restorations include a partial
restoration of benefit reductions on a dollar value equal to
those provided to active participants.
While some have incorrectly characterized this
recommendation as a proposal to cut accrued benefits, in
reality this is a proposal to preserve benefits above the
levels provided under the current law and applies only to those
plans which are otherwise required to make the more severe
benefit reductions.
In conclusion, the multiemployer community is unified
behind this set of proposals. They represent a consensus of a
diverse yet representative group of stakeholders from across
the multiemployer community.
As with any such endeavor, consensus does not imply
unanimous support for every aspect of the proposal and there
will be those who would prefer that some provisions were
different. Some of those differences simply reflect views by
groups whose parochial interests differ from the commission,
which attempted to place the good of the multiemployer
community first, recognizing that a strong retirement program
will meet the needs of covered participants and facilitate
retention of a skilled workforce.
We appreciate this opportunity to share our comments with
you on the recommendations of the commission and on the
importance of taking prompt action to preserve this system
which has served both participants and contributing employers
so well. I welcome your questions.
[The statement of Mr. DeFrehn follows:]
Prepared Statement of Randy G. DeFrehn, Executive Director,
National Coordinating Committee for Multiemployer Plans (NCCMP)
Chairman Roe, Ranking Member Andrews and Members of the Committee,
it is an honor to appear before you today on this important topic. My
name is Randy DeFrehn. I am the Executive Director of the National
Coordinating Committee for Multiemployer Plans (the ``NCCMP'').\1\ The
NCCMP is a non-partisan, non-profit advocacy corporation created in
1974 under Section 501(c)(4) of the Internal Revenue Code, and is the
only such organization created for the exclusive purpose of
representing the interests of multiemployer plans, their participants
and sponsoring organizations.
---------------------------------------------------------------------------
\1\ The NCCMP is the premier advocacy organization for
multiemployer plans, representing their interests and explaining their
issues to policy makers in Washington since enactment of ERISA in1974.
---------------------------------------------------------------------------
For over 60 years, multiemployer plans have provided a mechanism
for generations of employees of tens of thousands of predominantly
small employers in industries with very fluid employment patterns to
receive modest but regular and dependable retirement income.\2\ They
are the product of collective bargaining between one or more unions and
at least two unrelated employers that are obligated to contribute to a
trust fund that is independent of either bargaining party and whose
benefits are distributed to participants and beneficiaries pursuant to
a written plan of benefits. While most often associated with the
building and construction and trucking industries, multiemployer plans
are pervasive throughout the economy including the agricultural;
airline; automobile sales, service and distribution; building, office
and professional services; chemical, paper and nuclear energy;
entertainment; food production, distribution and retail sales; health
care; hospitality; longshore; manufacturing; maritime; mining; retail,
wholesale and department store; steel; and textile and apparel
production industries. These plans provide coverage on a local,
regional, multiple state, or national basis and can cover groups of
several hundred to several hundred thousand participants. By law, these
plans must be jointly and equally managed by both employers and
employee representatives.
---------------------------------------------------------------------------
\2\ The median benefit paid to participants of plans surveyed was
$908--See DeFrehn, Randy G. and Shapiro, Joshua, ``The Road to
Recovery: The 2010 Update to the NCCMP Survey of the Funded Position of
Multiemployer Plans'', The National Coordinating Committee for
Multiemployer Plans, 2011.
---------------------------------------------------------------------------
According to the PBGC's 2012 Annual Report, approximately 10.37
million people are covered by the approximately 1450 insured
multiemployer defined benefit pension plans.\3\ Generally speaking, the
majority of plans have been slowly, but surely recovering from the
back-to-back economic shocks of the past ten years, despite the
continuing sluggish economic recovery, with more than 60 percent of
plans having once again attained ``green zone status.''
---------------------------------------------------------------------------
\3\ Pension Benefit Guaranty Corporation FY 2012 Annual Report, p.
33.
---------------------------------------------------------------------------
When I last appeared before the Committee on February 2, 2012, it
was in the context of your hearing titled ``Examining the Challenges of
the PBGC and Defined Benefit Pension Plans.'' We recall your very
explicit statements that no government bailout should be expected and
have proceeded on that basis to craft very specific private sector
solutions that, if enacted, will go far towards addressing those
challenges.
It is unnecessary to dwell on the specifics of those challenges. It
is significant, however, to note that the passage of time has only
sharpened the focus on the need for attention. Based on the information
you gathered at that time and through subsequent hearings including the
release earlier this year of the PBGC's own forecast in its 2012
Exposure Report, the multiemployer guaranty fund's current economic
trajectory forecasts a 91% probability of insolvency by 2032.
Notwithstanding those sobering estimates, the stark reality appears
even more dire as conveyed to you by GAO Director of Workforce,
Education and Income Security Issues, Charles Jeszeck at your hearing
on March 5, 2013. He reported that ``In the event that the
multiemployer fund is exhausted, participants relying on the guarantee
would receive a small fraction of their already reduced benefit.'' \4\
He went on to describe an example that showed even the modest benefit
guaranty provided under the current statutory formula would likely be
further reduced by 90% or more. Clearly, the prospects of such
reductions are evidence that what the tens of millions of multiemployer
plan participants are being told in their statutorily mandated annual
funding notice about the guarantees to be provided by the PBGC in the
event of plan insolvency is more illusory than reality.
---------------------------------------------------------------------------
\4\ See Statement of Charles Jeszeck, March 5, 2013 to the
Committee re: ``Private Pensions--Multiemployer Plans and PBGC Face
Urgent Challenges,'' Page 17.
---------------------------------------------------------------------------
For the small, but significant minority of plans and participants
whose plans are facing ultimate insolvency, these predictions only
underscore the need for bold and decisive Congressional action sooner,
rather than later.
We commend the Committee for having spent considerable time in
evaluating the need for prompt attention to strengthen the system which
provides approximately one in every four private sector defined benefit
pensions. As the next step in that process we are pleased that you have
chosen to focus today on solutions to achieving that end.
Retirement Security Review Commission
In your February 2012 hearing I reported to you on the creation by
the NCCMP of a group known as the ``Retirement Security Review
Commission'' (or ``Commission'') comprised of representatives from over
40 labor and management groups from the industries across the
multiemployer community which rely on multiemployer plans to provide
retirement security to their workers. Beginning in August 2011, the
group deliberated over a period of approximately eighteen months
evaluating their collective experience with current laws and
regulations in the course of developing a comprehensive set of
recommendations for reforms to strengthen the system.
The recommendations which fall into three broad categories:
preservation, remediation and innovation, are described in a report
titled ``Solutions not Bailouts--A Comprehensive Plan from Business and
Labor to Safeguard Multiemployer Retirement Security, Protect Taxpayers
and Spur Economic Development.'' They include recommendations for
technical corrections to the Pension Protection Act (PPA) designed to
strengthen those plans that are recovering or have recovered from the
2008 recession, largely by building on the tools provided in the PPA
and subsequent legislation. These recommendations are described under
the provisions for preservation. The report also includes
recommendations for remediation measures to address the problems of,
and provide solutions for, the limited number of plans which, despite
having taken all reasonable measures, are projected to become insolvent
within specified time parameters. Finally, the recommendations include
provisions that encourage the creation of innovative alternative
designs to eliminate many of the current incentives for employers to
exit the system and reverse the trends which, unless addressed, will
only exacerbate the current decline in the pool of continuing
employers. These include alternatives that will permit the adoption of
alternative plan designs to significantly reduce or eliminate the
unpredictable and unacceptable residual costs associated with the
current system of withdrawal liability.
The following pages provide a brief description of the process
under which the Commission conducted its deliberations and some of the
specifics of the proposed reform measures.
Process
For decades, the multiemployer system provided modest yet secure
retirement benefits for generations of workers without jeopardizing the
ability of the contributing employers to remain financially viable.
With the sunset of the multiemployer funding rules contained in the PPA
approaching at the end of 2014, the re-emergence of significant
unfunded liabilities following the market collapse of the Great
Recession in 2008, and the expanded disclosures imposed by the
financial services community which adversely affect the ability of many
contributing employers to access the credit markets, the time has come
to revisit the labyrinth of existing rules which have evolved over the
past 40 years in order to restore stability to the system The
Commission was created as a vehicle to facilitate the development of a
consensus among stakeholders across the multiemployer community on
elements of funding reform that are necessary to achieve that
stability.
Because multiemployer plans are the product of the collective
bargaining process, any proposal for reform requires the active
engagement of both labor and management. The composition of the
Commission reflected a broad cross-section of both constituencies from
the aerospace, bakery and confectionery, building and construction,
entertainment, healthcare, mining, retail food, building services and
trucking industries. The diversity of interests and perspectives
ensured that the proposals for reform were representative of the wide
variation among plans and participants. Despite their differences,
Commission members remained focused throughout the process,
conscientiously engaging in a cooperative spirit of problem solving
that was both respectful and often vociferous as they worked toward
consensus on a range of issues.
Preservation
As the majority of plans regain sound financial footing, the
Commission recommends a number of technical amendments be made to the
PPA that are designed to address a number of issues which have surfaced
during the first years of its implementation. These include, but are
not limited to:
permitting elective ``critical status'' (red zone)
certification by plans which are determined by the plan actuary to
headed for such status within the next five years, allowing earlier
action in order to reduce the magnitude of expected benefit adjustments
and/or contribution increases required to meet their funding
obligations under the Act;
removing any contribution increases that are the direct
result of the adoption of approved funding improvement or
rehabilitation plans from the determination of what is to be taken into
consideration when calculating an employer's withdrawal liability.
Under the current rules, such additional contributions provide a strong
incentive for many contributing employers to choose to abandon their
current relationship with the fund rather than see the 20 year ``cap''
on withdrawal liability increase substantially;\5\ and
harmonizing the protections available to employers who
adopt an approved rehabilitation plan when a plan encounters a funding
deficiency so that those who adopt an approved funding improvement plan
when in endangered (yellow zone) status receive similar protections
from additional contribution and excise tax requirements were the plan
to experience a funding deficiency.
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\5\ Furthermore, such treatment is consistent with the provisions
contained in the PPA that prevent an employer from benefiting from a
plan's adoption of adjustable benefits in the determination of its
withdrawal liability in order to encourage its continued participation
in the plan.
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Remediation
Under current law, the anti-cutback rules require plans that are
heading for insolvency (referred to by the Commission as ``Deeply
Troubled'' plans) to maintain accrued benefits and pay such benefits at
current levels until the plan depletes the plans' assets to the point
of insolvency. At that time the plan fiduciaries are required to reduce
benefits to the statutory guarantee levels under the PBGC multiemployer
guaranty fund. They currently have no authority to intervene at an
earlier point even if the plan could remain solvent while preserving
benefit levels above the statutory guaranty levels. The net result
under current law is that the plan would then cease to provide future
accruals to active workers, most likely result in having employers
assessed withdrawal liability either because of their having elected to
withdraw from the plan or due to the plan's experiencing a mass
withdrawal, and increasing the liability to PBGC (thereby possibly
exposing taxpayers to greater exposure in the event the agency itself
becomes insolvent with liabilities owed to participants far in excess
of any amounts which could reasonably be funded through the existing
premium structures).
For the estimated six to ten percent of all multiemployer plans
that, despite having taken all reasonable measures, are projected to be
unable to avoid insolvency, the Commission recommends that the plan
fiduciaries' current authority be accelerated to permit intervention
while the plan may still be preserved rather than waiting until the
plan has depleted its assets to the point where it must cut benefits to
levels which, by the PBGC's own estimates, are unsustainable for the
future and would be subject to even more draconian reductions, provided
that:
after the adoption of such measures, the plan is expected
to remain solvent;
benefits may be reduced only to the extent necessary to
achieve continued solvency;
benefits may not be reduced below 110 percent of the
stated statutory guaranty levels under the current PBGC multiemployer
guaranty program;\6\
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\6\ Due to the relatively low benefits provided by many plans, the
110% level was chosen so as to provide access to the relief for many
plans that would otherwise be effectively precluded from utilizing this
valuable tool.
---------------------------------------------------------------------------
plan fiduciaries are required to design any plan changes
in an equitable manner;
the PBGC certifies that plan fiduciaries have exercised
due diligence in making such determinations and in designing the plan;
and
when the plan recovers sufficiently to permit benefit
improvements, those whose benefits were reduced must participate in any
such improvements through the restoration of such benefit reductions on
an equal dollar value to those provided to active participants.
While some have incorrectly characterized this recommendation as a
proposal to cut accrued benefits, in reality this is a proposal to
preserve benefits above the levels provided under current law and
applies only to those plans which are otherwise required to make more
severe benefit reductions.
Recognizing that taking earlier action could also impact the
benefits of pensioners who would not otherwise be affected because they
may be of sufficiently advanced age that they may not live until the
plan were to exhaust its assets, the plan fiduciaries are specifically
authorized to take the interests of such vulnerable populations into
consideration when designing their plan of intervention. It is expected
that most would take advantage of this authority and exclude them from
the reductions, especially since the costs associated with those
expected to draw benefits for a limited period would have only a modest
impact on the plan's long-term funded position. Only those plans which
currently pay benefits that are marginally above the PBGC guaranty that
might only qualify for the relief if such benefit reductions were
necessary to meet the ongoing solvency requirement might be expected to
apply these reductions across the board to allow the plan to survive.
Innovation
In its desire to make the system sustainable for the future, the
Commission recommends that the current law be broadened to encourage
greater creativity in designing plans to meet employees' ongoing income
requirements while reducing the exposure of contributing employers to
residual liabilities beyond their initial contribution. In doing so,
the Commission recognizes that the shortcomings of both the current
defined benefit and defined contribution systems need to be addressed.
While some innovative designs are possible within the current statutory
framework, there is a general recognition that the current structures
are not sufficiently responsive to the evolving needs of workers and
employers alike.
The Commission report describes two specific types of innovative
plan designs that are considered to be illustrative of the kinds of
flexibility required for the future. One is a variable defined benefit
plan which has recently been adopted by several groups and appears to
be permissible under the current Code definition of a defined benefit
plan. The other, a so-called ``target benefit'' plan, contains a
benefit formula that appears similar to a defined benefit plan, but is
designed to address many of the shortcomings of the current defined
contribution system. The design elements include limiting an employer's
liability to its negotiated contribution. It requires higher funding
requirements than current defined benefit plans, imposes self-adjusting
benefit features when those higher funding requirements fail to be met,
addresses longevity risk by paying benefits only in an annuity form
from a pooled account, and enhances benefits payable by reducing fees
and providing greater asset diversification through professional
management of plan assets. Creation of such a plan would require a
change to the existing code as it is neither defined benefit nor
defined contribution as currently defined.
Conclusion
The multiemployer community is unified behind this set of
proposals. They represent a consensus of a diverse yet representative
group of stakeholders from across the multiemployer community. As with
any such endeavor, consensus does not imply unanimous support for every
aspect of the proposals and there will be those who would prefer that
some provisions were different. Some of those differences simply
reflect views by groups whose parochial interests differ from those of
the Commission which attempted to place the good of the multiemployer
community first, recognizing that a strong retirement program will both
meet the needs of covered participants and facilitate retention of a
skilled workforce.
We appreciate this opportunity to share our comments with you on
the recommendations of the Commission and on the importance of taking
prompt action to preserve this system which has served both
participants and contributing employers so well. We look forward to
responding to your questions.
______
Chairman Roe. Thank you, Mr. DeFrehn.
Mr. Dean?
STATEMENT OF ERIC DEAN, GENERAL SECRETARY, INTERNATIONAL
ASSOCIATION OF BRIDGE, STRUCTURAL, ORNAMENTAL AND REINFORCING
IRON WORKERS
Mr. Dean. Thank you, Mr. Chairman and committee members. It
is a pleasure to be here.
In the interest of time, my assistant was a little
overzealous in preparing my oral testimony, and I stand by what
is in there but I am going to summarize to make adequate use of
my time.
I became a fourth generation ironworker in 1980. On and
around 1989 I got elected by my peers to be a steward and a
leader to represent them in their interest. I have served since
1995 in some capacity or another as a trustee on all types of
funds, from training funds, pension funds, welfare funds, and
labor management. So it is something that I don't take lightly.
When I came to Washington, D.C., I not only governed the
area I was from but had the responsibility of taking care of
North America and the United States and Canada. So the interest
that I now have as--I have governance over all of the pension
plans in the United States, both good and bad, and while the
percentage of ironworker plans are small, we recognize that
there are rules that restrict, so I am going to go into the
part of my presentation that is prepared.
On behalf of the International Association of Bridge,
Structural, Ornamental, and Reinforcing Iron Workers and our
industry, I am here on behalf of General President Wise, who
could not make it today, representing our union as well as
120,000 members to support the National Coordinating
Committee's Multiemployer Plans' recommendations as we move
forward towards solutions to our industries' current
challenges.
The ironworkers are not alone in recognizing the need for
comprehensive action to be taken to assure pension benefit
promises are met and allowed to deliver a new set of pension
laws which would allow for acting more expeditiously in
remediating funding issues caused by the unprecedented twice-
in-a-decade collapse of markets resulting in erosion to assets
held in our pension trusts.
The current laws require a virtual drawdown of all assets
prior to rehabilitation remedies being allowed to go into
effect. We strongly support the proposal by NCCMP, which we and
our employers participated in the commission, and as
stakeholders in the construction industry need desperately.
While there are provisions that can't cover every scenario, as
in the saying ``no one size fits all,'' our proposal attempts
to address several areas of importance that will result in
meeting the challenges and offering benefit levels greater than
the minimum level of protection currently offered.
NCCMP's recommendations would be optional to bargaining
parties. We are not seeking any taxpayer support.
NCCMP's recommendations would implement efficiency to allow
for harmonization with Social Security, which Congress saw as a
prudent step long ago. Their recommendations would allow
distressed sponsors the ability to provide greater benefits
than the current levels PBGC offers or protects our members
with. Their recommendations would also allow for innovation and
new plan design not currently allowed in the traditional
defined benefit and defined contribution plans.
I have included as an outline for your review, which is my
attempt not to monopolize your time so I can have more time for
questions. In summary, the key elements of our plan are to
include security for the participants while reducing financial
risk for its plan and its sponsors.
Members of Congress, the ironworking industry, and
specifically our union, need you to understand the needs of our
members and its employers as you consider the recommendations
of the NCCMP which will ensure that multiemployer plan
participants enjoy the dignity of retirement security and its
plan sponsors the ability to operate, maintain, and improve
pension systems they justly deserve.
Data suggests that defined benefits are the best pathway
for retirement security, and we understand and we recognize
there is a trend towards 401(k)s. There has not been a society
that has been able to live solely on a lump-sum retirement, and
we believe the best benefit going forward would be stabilizing
and preserving defined benefit plans.
I am happy to entertain any questions.
[The statement of Mr. Dean follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
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Chairman Roe. Thank you, Mr. Dean.
Dr. Ghilarducci?
STATEMENT OF DR. TERESA GHILARDUCCI, PROFESSOR,
THE NEW SCHOOL FOR SOCIAL RESEARCH
Ms. Ghilarducci. Thank you for inviting me. I am Teresa
Ghilarducci. I am the chair of the economics department at The
New School for Social Research and I am the author of the only
academic book that I know of on multiemployer plans, ``Portable
Pension Plans for Casual Labor Markets,'' Praeger Press.
I am also a trustee of several retiree health plans--they
are called VEBAs--for the United Auto Workers and for the
steelworker retirees of the Detroit auto companies and of
Goodyear Tire. That represents 900,000 what we call
bellybuttons--900,000 retirees and their families.
Relevant for this committee is that I was also a corporate
director for YRCW, one of the largest sponsors of one of the
largest plans at question here, the Central States Teamsters
plans, and 38 other multiemployer plans. I was the corporate
director because of my expertise in pension plans, and the
other corporate directors were newly appointed from the hedge
funds, the private equity firms, and some of the investment
bankers, who seemed to have only learned in business school and
law school that the only way you deal with pension liabilities
is to go through bankruptcy.
And so that company did not go through bankruptcy and is
dealing with its liabilities. But the--it seems as though in
our society the only way to deal with these troubled plans is
to dump them.
Multiemployer plans, as Randy has said and as Eric Dean has
said, are really interesting. They complement health plans and
apprenticeship plans; they help stabilize the employers in an
industry by letting them have--these employers, who are often
small--really have access to a skilled labor pool of people who
are loyal to their craft and to the job who wouldn't be there
if it wasn't for those employer plans.
So I agree with the report of the National Coordinating
Committee for Multiemployer Plans that these plans should be
preserved and they actually should be expanded and
strengthened.
Preventing large red zone plans' insolvency will protect
employers, workers, and retirees, and the PBGC. The proposal of
the National Coordinating Committee is to solve these
insolvency problems by, at the last resort, cutting retiree
benefits in only very special circumstances. They proposed that
when every possible design change has been done--revenue
enhancements, benefit reductions for non-retirees--when those
have taken then the cuts can happen, which they can't happen
now, if those cuts will prevent insolvency, if those cuts will
help participants maintain their long-term benefits, and if
they reduce exposure to new employers who may otherwise come
into the plan, and that is key to these long-term survival. And
preventing the defaults also helps the PBGC.
But cuts to retiree benefits are dangerous. Current
employees and workers may just leave the plans. And delaying
cuts is good policy. That is what we did at YRCW. Each delay in
cuts helps the retiree live another year under current living
standards.
But insolvency hurts everybody, including retirees. They
may have to go to the PBGC maximum, which is the poverty
pension, or they may get nothing.
So as a trustee of these auto and steelworker plans for 8
years I have been involved in a process that is very well
governed to gradually reduce retiree benefits, at the same time
protecting very vulnerable retirees, and that is because the
court told us to. I am a fiduciary with only the concern of the
retirees, but the court has established a very strict
governance structure so that the retirees are protected.
So in considering the National Coordinating Committee's
plan, you--Congress should very much consider the way retirees
will be represented on these plans. The PBGC is a good place to
house that representative, but in a different way that is
conceived now. That representative should be involved in an
ongoing basis, be well resourced in order to restructure the
plans.
And last, I don't think Congress should forestall any
attempts to get more revenue into these plans. Many nonunion
employers benefit from these plans. Nonunion carriers--big
ones; ones you have heard of--were actually poaching truck
drivers, who are quite, actually, in stark demand, because
those truck drivers had the benefits from YRCW.
So these nonunion plans were benefiting from these legacy
costs, and so they may be actually asked on with the industry
tax to maintain these legacy benefits. Congress did it before
when you established the Railroad Retirement Fund, when
nonunion employers were not paying these legacy costs. So you
might want to think about doing that again.
Thank you.
[The statement of Dr. Ghilarducci follows:]
Prepared Statement of Teresa Ghilarducci, Bernard and Irene L. Schwartz
Professor of Economics, the New School for Social Research
Thank you for inviting me to testify about options to strengthen
multi employer pension plans. I am Teresa Ghilarducci, Bernard and
Irene L. Schwartz Professor of Economics Policy Analysis, and Chair of
the Economics Department, at The New School for Social Research, in New
York City. I am the author of several books on retirement policy
including the only academic book on multiemployer pension plans.
Though I am a full-time academic I have practical experience
representing retirees and managing postemployment benefits. I am a
trustee of two retiree health plans for the United Auto Workers and
Steelworkers retirees of the three American auto companies and Goodyear
Tire--I am a trustee for nearly 900,000 retirees. I am also a former
corporate director of YRCW--May 2010-May 2011--a key employer-sponsor
of many multiemployer plans including the Central States Pension Fund
for the Teamsters. In that role I had the legal responsibility to
represent the sole interest of the corporations' shareholders.\i\
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\i\ I also taught economics at the University of Notre Dame for 25
years which is in South Bend, Indiana the site of the Studebaker
corporation whose abrogation of pension benefits in 1963 which
generated support for ERISA. I lived in a community with many retirees
benefiting from PBGC insurance and Studebaker retirees who did not. The
peace of mind and increase in the material standard of living of
elderly households with a modest, but secure, source of Social Security
supplement is significant.
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I agree with the PBGC, General Accounting Office, and the findings
and analysis of the National Coordinating Committee for Multiemployer
Plans Commission report--Solutions Not Bailouts \1\--which conclude
multi employer plans have economic benefit; they should and can be
preserved and strengthened if action is taken quickly. Further,
preventing large plan insolvency will protect the PBGC and many
employers, workers, and retirees. The NCCMP proposal to prevent
insolvency by allowing benefit cuts for current retirees in special
circumstances is well informed and makes paramount preserving long term
benefits for retirees. However, Congress should ensure that retiree
protections are sufficiently protective. Insolvency hurts everyone
especially retirees who risk taking a large cut in current benefits to
the PBGC maximum or, worse, obtaining nothing if the PBGC depletes its
assets. The NCCMP's statement of facts is consistent with the General
Accounting Office and the PBGC's description of the financial situation
of multiemployer plans.
---------------------------------------------------------------------------
\1\ Defrehn, Randy. and Joshua Shapiro. National Coordinating
Committee for Multiemployer Plans. 2013. Solutions not bailouts: a
report on the proceedings, findings and recommendations of the
Retirement Security Review Commission. Washington DC. February.;
Gotbaum, Joshua. 2012 and 2013. Testimony before the Health,
Employment, Labor and Pensions subcommittee house Committee on
Education and the Workforce. On December 12, 2012, and March 5, 2013;
Jeszeck, Charles. 2013. Testimony: Multiemployer Plans and PBGC Face
Urgent Challenges
---------------------------------------------------------------------------
Economic Case for Strengthening Multiemployer Plans
Multiemployer plans allow employers and workers to optimize labor
contracts in situations when employers cannot or will not commit to
long term contracts with employees, but still depend on skilled workers
loyally attached to the industry and craft.
What needs to be emphasized is that multiemployer pension plans,
health plans, and importantly apprenticeships plans are complements.
They create a framework enabling many types of workers--who otherwise
would be without--obtain a decent wage, training, and employee
benefits. In short, workers, who in other countries are at the bottom
of the labor market, can be in the United States near middle-class
construction laborers, janitor, coal miners, electricians, maids for
luxury hotels, big rig truck drivers, etc.
All employers gain from the training and industry loyalty;
Multiemployer pension plans would be stable if all employers who
benefit paid contributions. But only unionized employers pay. The PBGC,
NCCMP, and GAO do not address future sources of revenue, yet they deem,
as do I, that current employers cannot contribute more without losing
competitive advantages. Premium increases may be tolerated however.
Thinking bigger is to consider that Congress establishing the Railroad
Retirement System (see appendix) set a precedent to collect from
consumers, shareholders, and current workers to pay for pensions.
Congress should not give up seeking more revenue sources for the PBGC
multiemployer fund.
Ways to Strengthen the Plans
I agree with the NCCMP that the next wave of PPA reform must find
new revenue sources, reduce liabilities, and change plan design. What
is on the table now is reducing liabilities in the form of cutting
retiree benefits. The NCCMP and GAO acknowledges the necessity to do
everything in terms of plan design, revenue enhancement, and benefit
reductions for non-retirees before considering reductions for current
retirees.
The GAO and NCCMP agree that the vast majority of multis survived
the 2008 recession through shared sacrifice--by raising contributions
and cutting allowable benefits, such as early retirement benefits.
But the PBGC's multiemployer trust fund still faces probable
insolvency because large critically underfunded plans, when failed,
will likely petition for PBGC assistance over the next ten years and
the PBGC will not have enough funds. There are several pension plans in
the red zone that have done everything they can to survive and I agree
some plans can't survive without reducing retiree benefits. But cutting
retiree benefits is dangerous because current employees and workers may
give up on the plan and employers. Delaying the cuts is good policy,
every year longer is important for a retiree who have few options left
to maintain living standards.
Cutting benefits for current workers are justified only when
benefits will keep the plan solvent and maintain lifetime benefits and
other protections are in place.
While the PBGC multiemployer plan still has assets, the GAO report
shows retirees in insolvent plans would suffer, on average, a much
reduced benefit up to the PBGC's guarantee. That maximum PBGC benefit
of $1073 per month is about 50% of what the average long tenured
retiree receives. When the PBGC runs out of money, the retiree could
receive nothing.
I was a critic of the Pension Protection Act of 2006; but I am
pleased and surprised at the success of the Act, with the good faith of
Congress, to help many multiemployer survive the recession no one
predicted.
Now, that I have established multiemployer plans should continue,
how can we strengthen them? Cutting benefits for current retirees is
the last resort. Each plan will have unique circumstances and futures
so is it is not possible to legislate how the benefit cuts should be
implemented. The NCCMP proposal outlines key due diligence criteria:
the cuts must prevent insolvency, the cuts must help participants
maintain their benefits in the long run--the long run is emphasized;
the cuts must reduce exposure of employers in order to attract new
employers to the multiemployer plans; and to protect the PBGC's risk of
insolvency.
Further, the NCCMP acknowledges that the plans have to meet
objective standards of insolvency and that no benefits will be improved
until the cuts are restored.
Specific Ideas to Protect Retirees
As a trustee of the Voluntary Employee Benefits Trust the Auto and
Steelworker VEBAS for almost 8 years; I've been involved in an orderly
and transparent process to reduce retiree benefits in their health
plans in order to maintain and maximize their benefits. The retirees
understand that increasing cost-sharing and restrictions on drug and
medical benefits are necessary to keep their retiree health plans
intact, and immediate restrictions keep the plan going for a lifetime
so the cuts aren't permanent and drastic.
What is the legal authority? The VEBAs were established by the
courts, without a bankruptcy and not within bankruptcy codes, which
designated independent trustees and, in the case of the Steelworkers,
specific representatives of retirees. As an independent trustee I and
my fellow public trustees represent the beneficiaries of the plan
soley, and the court instructs us to distribute cuts to keep the very
old and poor safe from cuts. The Autoworkers and Steelworkers plans
each have unique structures that hue to the core principle of
protecting retirees. In some of the cases, current workers and the
employer have an obligation in the court agreement to continue to
contribute to the retiree health obligations.
When the courts established the VEBAs--the retiree health care
plans--it constituted a transfer of employer liability to a trust fund
for retiree health benefits, the court was very concerned about the
governance structure of the plans and that retirees, who are most
vulnerable and the state has an interest in protecting, were
represented. In addition to having very specific language about how the
cuts but the court agreements defined who vulnerable retirees are. In
the case of the auto VEBA, retirees who had very low pension amounts
were defined as vulnerable and in the Goodyear--Steelworker case
vulnerable retirees include the very old retirees. Different rules and
definitions of vulnerability are appropriate for different settings.
In summay, I agree with the basic principles in the NCCMP
Commission's report that the governance of an insolvent plan that cuts
retiree benefits must include affirmative and specific protections for
retirees. I support the analysis of the NCCMP Commission's report and
the direction of the solutions. Based on my experience and research,
Congress needs to provide a governance structure so that retirees are
represented by an independent and well-resourced fiduciary.
I agree that the PBGC is a good place to house a retiree advocate.
However Congress should ensure that the retirees have an advocate
actively responsible to ensure fair treatment of retirees. Effective
retiree representatives have to help shape the cuts, assess the
distribution and define, in terms particular to the plan and industry,
who the most vulnerable retirees are. I have learned that different
rules will have very different distributional effects under different
circumstances.
Congress should not give up on the idea that there could be new
revenue sources to multiemployer plans besides from employers in
critical status (who are already paying many more times the average
contribution to the fund). Congress should give serious thought to an
industry-wide assessment to help pay for these legacy cost. (See
Appendix.)
Last, I am quite excited about the report's description of new
benefit designs, including the target benefit--though discussion of new
flexible and attractive design is for another day--they should be
included in a PPA 2.0. Any solution to insolvency risks should include
a design that mitigates future risks of insolvency.
appendix: more revenue sources
The United States faced a similar situation with mature and
insolvent employer pension plans in the early 1900s and an industry tax
restored retiree benefits. The American Express company (a railway)
established the first corporate pension plan in 1875. Recessions and
competition from smaller new railroads caused the first plans to cut
and stop paying benefits. If not for retiree protests, Congress would
not have created the Railroad Retirement system in 1934 before Social
Security. The Railroad Retirement system collects pension contributions
from all employers in the industry to pay for the depreciation of long
tenure employees. The underlying justification was that the young
railroads enjoyed legacy benefits provided by railroads--the
development of the industry--and they should share in paying for the
legacy costs.
In 2010, during my tenure as corporate director for YRCW, it was
public knowledge that the trucking company had three problems: loss of
revenue from the 2008 recession, a shortage of skilled truck drivers,
and, more importantly, a large nonunion logistics company's setting
prices below costs to gain permanent market share in key markets. Both
firms would benefit from more people wanting to be truck drivers, but
the newer nonunion company's strategy was early 20th century nonunion
railroads' strategy--to slash prices and labor costs; making hard
physical labor even less attractive.
______
Chairman Roe. Thank you for your testimony.
Ms. Murphy?
STATEMENT OF MICHELE MURPHY, EXECUTIVE VP OF HR AND CORPORATE
COMMUNICATIONS, SUPERVALU, INC.
Ms. Murphy. Good morning. Thank you, Chairman Roe, Ranking
Member Andrews, and members of the subcommittee, for the
opportunity to testify on this important topic.
My name is Michele Murphy, and I am the executive vice
president of human resources for SUPERVALU Inc. I have
responsibility for SUPERVALU's pension plans, and I am a
trustee on one of our multiemployer pension plans.
You may have heard that SUPERVALU has divested many of its
retail and distribution operations. Today's information is
about the remaining SUPERVALU.
We are a Fortune 500 company and one of the largest grocery
wholesalers and retailers in the U.S., with approximately $17
billion in sales. We are one of the founding members of the
Association of Food and Drug Retailers, Wholesalers, and
Manufacturers, a group of food employers concerned with the
future of multiemployer pension plans.
Today, SUPERVALU operates 572 supermarkets, 177 pharmacies,
and 41 distribution centers in 34 states. Our distribution
network also supplies over 3,000 independent grocers,
franchisees, and licensees.
SUPERVALU's net earnings margin is just over 1 percent in a
highly competitive industry. We also support approximately
2,100 charities, schools, and grassroots organizations and
contributed food and funds equal to about 4.2 million meals in
2012.
We have about 35,000 employees, almost 15,000 of which are
unionized in 52 different union contracts, making SUPERVALU one
of the larger union employers in the U.S. We work primarily
with two labor unions: the UFCW, which represents about 74
percent of our unionized workforce; and the IBT, which
represents another 24 percent.
SUPERVALU contributes to 20 multiemployer defined benefit
pension plans. In 11 of those we account for 5 percent or more
of the plan's total contributions.
In 2012 SUPERVALU contributed approximately $38 million to
these plans. Currently, we have withdrawal liability in the
majority of these plans estimated at over $500 million.
As this subcommittee is well versed on the general rules
applicable to multiemployer pension plans and how those current
rules currently preclude new employers from joining the plans,
I will focus my comments on SUPERVALU's specific situation. But
one illustration highlights the problem with the current rules.
As you know, Hostess filed for bankruptcy in 2011. Its
bankruptcy increased the remaining employers' share of the
unfunded liability of Central States by almost $600 million.
Our share--SUPERVALU's share--of these unfunded liabilities is
estimated to have increased by about $9 million even though
none of those employees ever worked at SUPERVALU.
While we participate in 20 multiemployer pension plans, a
majority of our withdrawal liability is attributable to the
Central States Pension Plan. Of the 20 plans that SUPERVALU
participates in, two are projected to become insolvent in the
next 10 to 20 years, mostly due to the orphan retirees, left
unfunded by their employers, unable to pay their fair share.
We have worked with our unions at the bargaining table, and
our trustees have worked with union trustees and other
employers to address the underfunding of these plans. This work
has focused primarily on a combination of increased
contributions as well as prospective benefit adjustments.
Over the last several years, about 30 percent of all of our
contract settlements have gone to increase contribution in the
pension plans. While these increases are needed, they leave
little money left over for wage increases.
There are other anomalies and threatening conditions that
we experience attributable to participation in plans. For
example, we closed two Teamster facilities; we moved the work
to other Teamster facilities participating in Central States,
so no withdrawal liability. But if that work had moved to other
union facilities, hundreds of millions of withdrawal liability
could have been triggered.
We have one small UFCW fund where contribution rates, while
low, increased over 246 percent in a 2-year period. In a small
Teamster fund, contribution rates will increase 19 percent each
year of a 5-year contract.
Our rating agencies are acutely aware of our withdrawal
liability, essentially treating it as debt when we refinanced
earlier this spring.
I believe we are nearing a tipping point where good and
successful employers could be brought down because of the
unintended consequences of MPPAA. If this happens, plans will
go insolvent. That harms retirees and ultimately costs the
federal government.
There are, however, solutions to the multiemployer plan
dilemma that can help moderate or avoid the worst consequences,
such as those solutions proposed by the NCCMP in its report. We
have been represented in this work through the Food Association
and we endorse the NCCMP report.
In our opinion, salvaging troubled plans is the most
important area for Congress to address. A ``wait and see''
approach could ruin employers, put employees out of jobs,
reduce pension payments to retirees, and endanger the existence
of the PBGC.
The most important change is to allow a plan's board of
trustees to suspend benefits even to retirees if absolutely
necessary to prevent the plan from becoming insolvent.
Naturally, safeguards would be needed to ensure that the
reductions were done equitably.
The second topic I want to touch on is technical
corrections to the PPA. The PPA was an important piece of
legislation that started down the right course for
multiemployer plans and should not be allowed to sunset at the
end of 2014.
Some minor changes would enhance its effectiveness. These
include allowing plans that are projected to enter the critical
zone in the next 5 years to enter it in the current year,
thereby moderating the actions that need to be taken to fix the
plan. Second is to conform the rules for plans that are
endangered, or yellow status, and those in critical and red
status so that the ``critical'' rules apply to all, and to
ensure that the contribution increases that are attributable to
funding improvement and rehabilitation plans will be
disregarded for purposes of calculating withdrawal liability.
We also need to look at new types of plans that both
provide retirement benefits that are reasonable and secure and
protect contributing employers from the risk associated from
other employers going bankrupt.
In conclusion, I want to thank you again for the
opportunity to testify. SUPERVALU applauds this subcommittee
for its leadership in addressing the structural problems
attributable to the multiemployer system, and we look forward
to working with you on solutions that will ensure its continued
viability.
Thank you, and I am happy to answer any questions.
[The statement of Ms. Murphy follows:]
Prepared Statement of Michele Murphy, Executive Vice President,
Human Resources and Corporate Communications, SUPERVALU Inc.
Thank you Chairman Roe, Ranking Member Andrews, and members of the
Subcommittee for the opportunity to testify today. My name is Michele
Murphy. I am the Executive Vice President of Human Resources and
Corporate Communications for SUPERVALU Inc. (``SUPERVALU''). I have
responsibility for SUPERVALU's pension plans, and I serve as a Trustee
for one of the 20 multiemployer pension plans in which SUPERVALU
participates.
I. About SUPERVALU Inc.
As a preliminary matter, you may have read or heard about
SUPERVALU's recent divestiture of many of its retail stores and
warehouse operations. The information I am providing you today is for
the remaining SUPERVALU, meaning the going forward company.
SUPERVALU is a Fortune 500 company (about #150) and one of the
largest grocery wholesalers and retailers in the U.S., with annual
approximately $17 billion in sales.
SUPERVALU is also one of the founding members of the Association of
Food and Dairy Retailers, Wholesalers and Manufacturers, a group of
employers spread throughout the food industry that is concerned with
the future of multiemployer pension plans (the ``Food Employers
Association'').
Today, SUPERVALU operates 572 supermarkets , 177 pharmacies and 41
distribution centers, located in 34 states. Our distribution centers
supply not only the company-owned supermarkets I just mentioned but
also almost 3,000 independent grocers, franchisees and licensees.
SUPERVALU's net earnings margin is just over 1%, reflecting the highly
competitive nature of the retail food industry.
SUPERVALU also supports approximately 2,100 charities, schools and
grassroots organizations in the communities we serve, and contributed
food and funds equal to 4.2 million meals in 2012.
SUPERVALU has approximately 35,000 employees. About 15,000 of these
employees are covered by 52 collective bargaining agreements
(``CBAs''), making SUPERVALU one of the larger unionized employers in
the United States. SUPERVALU primarily works with two labor unions--the
United Food and Commercial Workers International Union (``UFCW''),
which represents almost 74% of our unionized workforce, and the
International Brotherhood of Teamsters (``IBT'') which represents about
24% of our unionized workforce. SUPERVALU's other unions include the
Bakery, Confectionery, Tobacco Workers and Grain Millers International
Union (``BCTW&GM''), the International Union of Operating Engineers
(``IUOE''), the International Association of Machinists (``IAM''), the
Automotive, Petroleum and Allied Industries Employees (``AP&AIE''), and
the United Steelworkers (``USW'').
SUPERVALU contributes to 20 multiemployer defined benefit pension
plans. In 11 of these plans, we account for 5% or more of the plan's
total contributions. In 2012, SUPERVALU contributed approximately $38
million to these plans as required by our CBAs. However, as described
in greater detail below, if the NCCMP multiemployer reform
recommendations are not enacted into law, SUPERVALU could be required
to contribute more than $500 million over the long term (in addition to
the contributions currently required under its CBAs) to fund pension
benefits previously accrued under these plans, as 19 of these plans
have withdrawal liability. Much of this money would not go to cover the
pension costs of SUPREVALU employees or retirees but rather to cover
pension costs of retirees who never worked for SUPERVALU.
II. Multiemployer defined benefit pension plans
A. Overview
A multiemployer defined benefit pension plan is a retirement plan
to which more than one employer contributes. These plans are managed by
a board of trustees, half of which are appointed by contributing
employers and half of which are appointed by participating unions. The
plans are funded pursuant to CBAs. In most plans, the employer
contribution levels are established in the CBA through collective
bargaining between the respective employers and unions. The Board of
Trustees establishes the pension benefits to be provided to
participants, based on the Plan's funding levels and projected
contributions. Many multiemployer plans were designed to serve as
retirement vehicles for smaller employers and employers with a mobile
workforce, where employment patterns prevented employees from accruing
adequate retirement benefits under traditional, single employer pension
plans. In other words, multiemployer plans were established so that
workers' pensions could be portable as they moved from job-to-job
within the same industry. They are most common in the retail,
transportation and construction industries.
Multiemployer plans are subject to the Labor Management Relations
Act of 1947, otherwise known as the Taft-Hartley Act. These plans are
also subject to the Employee Retirement Income Security Act of 1974
(``ERISA'') and the relevant provisions of the Internal Revenue Code of
1986. As I stated before, these plans are required to have equal
employer and union representation on the board of trustees. Although
the trustees are selected by management and labor, they are required by
law to act solely in the interests of plan participants.
B. Withdrawal Liability
Before the enactment of ERISA and the Multiemployer Pension Plan
Amendments Act of 1980 (``MPPAA''), an employer's obligation to a
multiemployer plan was generally limited to the contribution it was
required to make during the term of the CBA. Once it made the agreed-
upon contribution, the employer had no further liability. Thus, if an
employer terminated participation in a multiemployer plan following the
expiration of its CBA, it did not have any further liability to the
plan.
In 1980, Congress enacted MPPAA, which was designed to address
perceived problems with the multiemployer pension plan rules, including
the possibility that an employer could terminate participation in a
plan without having fully funded its share of plan benefits. MPPAA, in
turn, strengthened the manner in which pension benefits were protected
by requiring contributing employers that terminated their participation
in a plan to make payments to cover their share of any unfunded
benefits. This is known as ``withdrawal liability.''
C. ``Last-Man Standing'' Rule
When a withdrawing employer fails to fully pay its withdrawal
liability (which is common for employers that become bankrupt or simply
go out of business) the responsibility for the unfunded liabilities of
the bankrupt employer is shifted to the remaining contributing
employers in the Plan. This is referred to as the ``last-man standing''
rule. In many ways, the last man standing rule is endangering
successful employers and their employees because the successful
employers are required to pay for the failure of unsuccessful companies
in the Plan.
Even in those cases where an employer exits a plan and fully pays
its withdrawal liability, the remaining employers are still responsible
for ensuring that there is adequate funding in the future to cover plan
liabilities attributable to the exiting employer. Thus, if the plan has
adverse investment experience, the remaining employers must ultimately
pay additional contributions to fund the benefits of the workers and
retirees of the withdrawn employer unless the plan experiences future
``excess'' investment returns that make up the loss.
D. Implications
The ``last man standing'' rule saddles employers that remain in a
multiemployer plan with potential liability for pension obligations of
workers and retirees that never worked for the remaining employers.
This includes not only those who worked for a competitor of the
remaining employers, but also, in many cases, those who worked in a
completely different industry than the remaining employers. Shifting
risk to the remaining employers places an unfair burden on the
remaining employers and, depending on the employer's financial
condition, could threaten the continued viability of these companies,
too. Essentially, it creates a domino effect within the multiemployer
pension plans that ultimately damages otherwise successful employers,
reduces pension benefits for retirees, and puts further strain on the
Pension Benefit Guarantee Corporation.
Given the impact of the ``last-man standing'' rule, it is not
surprising that multiemployer pension plans are not attracting new
employers. Employers do not want to join a multiemployer plan that
could expose them to future withdrawal liability on benefits earned by
employees of other employers, including benefits earned long before the
employer joined the plan.
E. Pension Benefit Guaranty Corporation
The last-man standing rule also underscores the disparity in the
way the government insures single employer pension plans versus
multiemployer pension plans. If an employer in a multiemployer plan
goes bankrupt and cannot pay the withdrawal liability, the first step
is for other contributing employers to assume the unfunded liabilities
of failed employers and essentially pay for these liabilities through
higher contributions to the multiemployer pension plan. This makes the
remaining employers more costly and less competitive in the
marketplace. As more contributing employers fall by the wayside, the
previously successful employers become less successful and they, too,
become in danger of going out of business. This is the domino effect I
mentioned earlier. Eventually, the funding burden becomes too severe
for the multiemployer plan and its contributing employers.
For example, the Hostess bankruptcy in 2011 increased the remaining
employers' share of the unfunded liability of the Teamster's Central
States, Southeast and Southwest Areas Pension Plan (``Central States
Pension Fund'') by almost $600 million. SUPERVALU's share of these
unfunded liabilities was about $9 million even though SUPERVALU
comprises less than 2% of the Central States Pension Fund. This is
worth repeating--SUPERVALU's contributions to Central States are
funding about $9 million of unfunded liabilities attributable to
Hostess employees and retirees--even though they never worked for
SUPERVALU, and in fact, worked in a different industry.
If a multiemployer plan becomes insolvent, the PBGC loans money to
the plan to pay benefits, and the pension payments must be reduced to
the extent they exceed the PBGC statutory maximum. Currently, the
maximum PBGC multiemployer guarantee is $12,870 per year for a retiree
with 30 years of service at age 65. This is far different from a
failing single employer plan for two reasons. First, with the failed
single employer plan, the PBGC steps in and assumes the plan's
liabilities and assets and pays the pension benefits. Second, the
benefits in a single employer plan are subject to a maximum guarantee
of about $57,477 per year, much higher than the multiemployer plan
guarantee level.
III. SUPERVALU's participation in multiemployer defined benefit plans
Like many food employers, SUPERVALU began participating in
multiemployer plans at least as far back as the 1960s--in an era during
which its exposure to these plans was limited to the contribution it
was required to make during the term of its CBAs. Thus, its decision to
participate in these plans was made well before the rule changes made
by ERISA and MPPAA.
As a result of its warehouse and transit operations, SUPERVALU,
like a number of food employers, became a contributing employer to
trucking industry multiemployer pension plans during the 1960s--at a
time when trucking companies were federally regulated and, thus,
dominated participation in these plans. Deregulation has resulted in a
dramatic consolidation in the trucking industry since the 1980s. Thus,
many unionized trucking industry employers have left the business (many
through bankruptcy), and food and beverage employers--like SUPERVALU--
now represent the largest segment of contributing employers to many of
these multiemployer plans.
The impact of the market consolidation in the retail food and
trucking industry was exacerbated by the 2001 tech bubble and the 2008
stock market crash. Much of the current multiemployer plan underfunding
is a direct result of these market events, as well as the structural
problems inherent in ERISA and MPPAA. All of these factors have
resulted in reduced plan funding levels and lower the contribution
streams into the plans.
As previously mentioned, SUPERVALU could be required to make
additional future contributions of $500 million simply to fund
previously accrued pension benefits, with most of this additional
contribution going to fund the benefits of participants who never
worked for SUPERVALU. In fact, this may be an optimistic estimate
because it assumes a very conservative employer attrition rate.
While SUPERVALU participates in 20 different multiemployer plans,
approximately 60% of its exposure is attributable to the Central States
Pension Fund. It is estimated that 40% of the current retirees in the
Central States Pension Fund are ``orphans'' who worked for employers
who have left the Fund and who did not work for any of the remaining
contributing employers in the plan.
IV. SUPERVALU's multiemployer plans
SUPERVALU has also been a long-time proponent of multiemployer
funding reform, including increased transparency. In 2005, SUPERVALU's
then CEO, Jeff Noddle, testified before Congress in support of the
Pension Protection Act. Further, for the past several years, SUPERVALU
has disclosed in its Annual Report its participation in multiemployer
plans, including the theoretical estimate of its aggregated exposure to
the underfunding in such multiemployer plans. These disclosures provide
more detail than is required by federal accounting rules.
SUPERVALU has also worked with unions at the bargaining table, and
its trustees have worked with union trustees and other employers to
address the funding of the 10 multiemployer plans on which SUPERVALU
has a trustee. Given the current rules, this work has focused on a
combination of contribution increases and prospective benefit
adjustments. Over the last several years, when bargaining labor
contracts with multiemployer plans, more than 30% of SUPERVALU's total
package settlement dollars have gone to increased contributions to the
multiemployer pension plans in order to try to improve the funding of
these plans. While we believe these increases were needed, they
unfortunately resulted in little money being left over to pay wage
increases, especially in light of the continuing increases in health
care costs.
There are many other anomalies and threatening business conditions
SV experiences attributable to its participation in multiemployer
plans. For example:
SV recently closed 2 Teamster facilities. The work was
transferred to other facilities participating in Central States so
withdrawal liability was not triggered. However, had the work been
moved to other union facilities that did not participate in Central
States, hundreds of millions of dollars in withdrawal liability would
have been triggered.
SV has one UFCW fund where contribution rates increased
over 246% in a 2 year contract. In another Teamster fund, contribution
rates will increase 19% each year of a 5 year contract.
SV rating agencies are acutely aware of SV withdrawal
liability, essentially treating it as debt when we refinanced debt this
past spring.
Notwithstanding these efforts, SUPERVALU still faces significant
exposure from underfunded plans, as do hundreds of other employers. We
are nearing a tipping point where many good and successful employers
will be brought down because of the unintended consequences of MPPAA.
If this happens, multiemployer plans will go insolvent, resulting in
harm to retirees and, ultimately, costing the federal government
billions of dollars. Now is the time for Congress to act to prevent
such a crisis.
V. Suggested concepts Congress should consider
The National Coordinating Committee for Multiemployer Plans
(``NCCMP'') has worked diligently with many employers and unions over
the past several years to prepare recommended legislative solutions to
the multiemployer plan dilemma. SUPERVALU has been represented in this
work through its membership in the Food Employer Association and
supports the solutions set forth in the NCCMP report. The NCCMP report
sets forth many ideas to improve the current law with respect to
multiemployer plans. The following is a discussion of one of the
measures that are particularly important to SUPERVALU as a contributing
employer.
A. Remediation: Measures to Assist Deeply Troubled Plans
In our opinion, salvaging troubled plans is the most important area
for Congress to address. A ``wait and see'' or a ``do nothing''
approach will simply not work. It would ruin employers, put employees
out of work, reduce pension payments to retirees, and ultimately
endanger the existence of the PBGC. Changes need to be made to
multiemployer plan rules--and now is the time. The most important of
these changes would be to allow a plan's Board of Trustees to implement
a program that would suspend benefits, even to retirees, if doing so is
necessary to prevent the plan from becoming insolvent and to preserve
the plan for its participants. Naturally, certain safeguards would need
to be enacted to make sure these reductions were done in the most
equitable manner possible.
The biggest example of this issue for SUPERVALU is the case of the
Central States Pension Fund. As I said before, SUPERVALU's share of the
unfunded liabilities continues to grow every year as other Central
States employers fall by the wayside. The retirees from these failed
companies would be much better off in the long run if pension benefits
were reduced now instead of waiting until the Plan becomes insolvent,
when these same retirees could have their pensions cut by as much as
two-thirds (and possibly much more, unless the PBGC is provided the
necessary funds to meets its obligation with respect to the
multiemployer plan guarantee).
B. Preservation: Proposals to Strengthen the Current System
The second topic I want to discuss is technical corrections to the
Pension Protection Act (``PPA''). The PPA was an important piece of
legislation that started setting the right course for multiemployer
plans. We strongly believe it should not be allowed to sunset at the
end of 2014. That being said, there are many minor technical changes
that we believe should be made which, when taken together, would
greatly improve the ability of multiemployer plans to improve their
funding levels. Some of these are:
Allowing plans that are projected to enter the critical
zone within the next five years to enter critical status in the current
year. By allowing plans earlier access the additional tools afforded
plans in critical status, the plan may be able to moderate the actions
that must be taken to fix the plan.
Conform the rules applicable to plans that are in
endangered and critical status by providing that the same rules
applicable to red zone plans will apply to yellow zone plans during the
funding improvement adoption period and the funding improvement period.
Currently different rules apply to plans in the yellow zone that are
more onerous than those that exist for red zone plans. This illogical
structure should be corrected by applying the red zone rules to yellow
zone plans
Provide that any contribution increases attributable to
Funding Improvement Plans or
Rehabilitation Plans will be disregarded for withdrawal liability
purposes. The additional contributions required to improve plan funding
under a funding improvement or rehabilitation plan are producing a
perverse incentive for employers to withdraw in order to avoid having
these additional contributions result in greater potential withdrawal
liability. For example, three employers withdrew in the last year from
a small UFCW pension plan in Wisconsin because the increased
contributions required under the rehabilitation plan were dramatically
increasing their withdrawal liability exposure. The employers felt it
was better to exit now and basically pay double their current
contribution rate--the multimillion dollar withdrawal liability
assessment plus an amount equal to their current contributions into a
defined contribution plan--instead of risking increased withdrawal
liability exposure attributable to the increasing required
contributions. If the additional money was not added to the
contribution rate for calculating the withdrawal liability payments,
these employers may have stayed in the multiemployer plan.
C. Innovation: New Structures to Foster Innovative Plan
Designs
Finally, we need to look to new types of multiemployer retirement
plans that both provide reasonable benefits to retirees and protect
contributing employers from risks associated with other employers going
bankrupt. One of these mechanisms would be the creation of a new form
of multiemployer plan, that would provide protection to employers
(because no withdrawal liability) and would protect the core benefits
of retirees (unless adjustment is necessary to prevent plan
insolvency).
VI. Conclusion
Again, Chairman Roe, Ranking Member Andrews, and members of the
Subcommittee, I thank you for the opportunity to testify to your
Subcommittee on behalf of SUPERVALU and the Food Employers Association.
SUPERVALU applauds this Subcommittee for its leadership on important
job of addressing the structural problems facing the multiemployer
system. We are grateful for the opportunity to tell our story, and we
look forward to working with you and others on a solution that will
ensure the continued viability of the multiemployer pension system.
______
Chairman Roe. Well, I thank all the panel for an excellent
presentation, laying out the problem, and now we are getting to
the solution phase, which is not going to be easy.
And I want to thank Ranking Member Andrews for his very
hard work on this. I think both sides of the aisle are
committed to finding solutions and getting it done. We have a
perfect window when certain provisions of the PPA sunset in
2014, so we have the time to do it and the need to do it.
And, Mr. Dean, I want to start with what you were talking
about a minute ago. It looked like the solutions to this
problem are not easy but there are 4 or 5, and one is that we
can increase premiums, and that has been done in the single
employer plan. You can do that. That is one of the things you
can do.
And you also mentioned--I think several of you mentioned--
that we have--people have forgotten we had two recessions in 10
years. We had the tech bubble in the early 2000 era, and then
the most recent one, the housing collapse, which created other
stresses on these defined benefit or any pension plan, for that
matter.
So we can increase premiums. I think that plans have to
look at not looking at unrealistic returns. I mean, we have
some of the plans looking at 7 to 8 percent returns ad
infinitum, and I think that certainly is not feasible over the
next 20 years.
Reduced benefits, which, as has been mentioned, is not--
obviously we would like not to do it, but we may have to do it
in some--to preserve benefits, and that is a hard sell when you
have people retired out there who are depending on this income.
And some of these incomes are not all that generous to begin
with, so families are living on every dollar they have, and to
cut that would really create a real issue for them. So I feel a
responsibility to maintain as much of that income for them as
we can.
And then last of all we have talked about is, you know, a
taxpayer bailout to private unions, which I think--to private
plans, I mean, which I think no one wants.
The concept of the multiemployer pension plan I like. It
allows a person to go from here to there, he may work at a
journeyman job at various ones, but can also plan for their
retirement. And I think the concept, I think, is good.
Ms. Murphy, I was intrigued--got up early this morning and
read your testimony again before we came here, and I want you
to go back on what you--the last thing you said was some
solutions about when plans are scheduled to enter the red zone,
and the ultimate catch-22 that you find your very solid company
caught in, where the longer you stay the more--and other plans
either go bankrupt or just go out of business--that it puts
more and more stress and more reason for you to try to get out
of this plan instead of encouraging people to get in it. Could
you go over that a little bit more?
Ms. Murphy. I would be happy to. You have mentioned the
last man standing rule, and the Central States plan is a good
example of that, where hundreds and many more have left Central
States without paying their unfunded liability. The employers
that continue to stay in are really penalized for that because
their withdrawal liability increases with the number of orphan
retirees that remain in the plan.
So every employer is looking at that downside of staying in
the plan, and while they may want to do that, as a publicly
traded company you certainly have to look at the financial risk
of doing so.
Chairman Roe. You know, and you mentioned a 1 percent
margin. I was very familiar with that number in the grocery
business. So you have got a pretty thin margin to start with.
One suggestion, as I started my comments off, was just to
continually raise the contribution limit. Would you speak to
whether you can solve the problem by just doing that--in other
words, going from $12 to $20, or pick a number?
Ms. Murphy. Yes. Unfortunately, we don't think that is a
viable solution. Contribution rates have increased pretty
dramatically over the years, and even Central States has looked
at employer contribution rates and has concluded that that is
not a viable solution because there is an inverse proportion:
as contribution rates go up, more and more employers will find
it unaffordable, leave the plan, and ultimately the total
contributions coming into the plan will not increase.
Chairman Roe. So I see. You go out of business, you put a
little more in, you have a net nothing increase.
I know Mr. Andrews has a hard appointment at 11 o'clock. I
will now yield to him?
Mr. Andrews. Thank you very much. I appreciate your
indulgence.
I really appreciate the testimony of the witnesses.
And, Mr. DeFrehn, let me compliment you and your coalition
for the years of hard work you have done on this issue. And the
process that you outlined I think was very fair, very open,
very transparent in dealing with some very difficult issues.
You have given us a report that I think is a very sound basis
to solve this problem, and I appreciate it.
I heard the chairman go through a list of solutions, and I
embrace all of them. Looking at an increase in PBGC premiums is
not easy but it is necessary.
Certainly producing and facilitating more economic growth
so the assets can be worth more in the plans is something we
all embrace and certainly hope we can achieve. I agree that
more careful and prudent and conservative estimates about
returns are important so that the actuarial picture that we are
looking at for these plans is based upon reality and not
aspiration.
And then finally, a fair and negotiated, collectively
bargained approach to restructuring benefits is essential, and
I want to emphasize the words ``fair'' and ``collectively
bargained.'' We believe that representatives of the workforce
and the employers should have the discretion and the authority
to achieve the best result that they think they can achieve
without our micromanagement or interference.
There is a fifth option that I think we ought to think
about, and the chairman made reference to it when we met in
December to talk about the Hostess bankruptcy, and that was the
effect of the bankruptcy laws on the machinations of these
plans. I want to ask each of the four of you if there is a
change that you would like to see in the bankruptcy law, which
goes beyond our jurisdiction but I think is necessary to
address this problem. What change would you like to see?
Mr. DeFrehn, you want to start?
Mr. DeFrehn. Sure. And thank you for those kind remarks.
Bankruptcy has been an issue that the community has dealt
with over the years in kind of a mixed way. Obviously from a
plan standpoint, having an increase in the priority level would
help protect the plan assets. The flip side of that, though, is
if you do that then it further restricts the employers' ability
to access the credit markets. So that has always been a tension
between the two.
We have had the Hostess situation, which everybody is
familiar with, and even more recently, last week, the courts
decided in the Patriot Coal Company to also dismiss vast
amounts of liabilities, which will also create problems for
that trust fund, which is already in trouble----
Mr. Andrews. Which is already in horrific shape to begin
with, right?
Mr. DeFrehn. Yes. Yes. As a result, if I might add, of some
unintended consequences of congressional action in the Clean
Air Act. Sometimes things just don't work out the way we
expect.
But I would think that one thing that Congress could look
at from the bankruptcy side of things is on the flip side, once
a company emerges from bankruptcy. If there were an ability to
go back and assess some of those liabilities once the company
comes out of bankruptcy there may be some way----
Mr. Andrews. Maybe a deferred liability----
Mr. DeFrehn. A deferred liability of some sort, that is
correct, rather than looking at it up front to create greater
impediments to the credit market.
Mr. Andrews. I want to give Dr. Ghilarducci a chance to
respond, as well.
Ms. Ghilarducci. [Off mike.] A change in the bankruptcy law
would have helped my work--would have helped my work at the
Yellow Freight--the YRCW deliberations as a corporate director
because the bankruptcy laws had in place ways that did not
presume that the way to solve pension liabilities was to go
through bankruptcy, that would have given a chilling effect to
the kinds of discussions we had about how to deal with this
troubled but strong company. It might also change the way
pension liabilities and pension obligations are taught in
business school, where it is just not the bankruptcy would be
the way out----
Mr. Andrews. Now we are really going to get accused of
micromanaging--business school curriculum.
Ms. Ghilarducci. There are signals to the parties making
these agreements about what is permissible.
So if you actually made pension liabilities as important as
tax liabilities, or responsibilities for the environment, or
that you can't get away from criminal culpability by going
through bankruptcy, then the pension liabilities may be treated
in a different way at the very beginning.
Mr. Andrews. Do either of the other witnesses care to
comment on this?
Ms. Murphy. All I would say--we don't advocate a change in
bankruptcy law but I think it is incumbent upon employers and
unions to work together as early as possible in these issues,
and exiting the plans isn't the only solution either in
bankruptcy. Some in our industry have figured out ways by
working together to actually stay in the plan and continue
participating.
Mr. Andrews. Thank you, Mr. Chairman, very much.
Chairman Roe. Thank the gentleman for yielding.
Dr. Bucshon?
Mr. Bucshon. Thank you very much, Mr. Chairman.
First of all, just from a--my dad is a retired united
mineworker, so I have--one thing I wanted to find out for my
own edification, that the pre-1974--are there other people
covered--retired workers in the mining industry--by plans that
were pre-1974? Does anyone know the answer to that question?
Mr. DeFrehn. Well, having started my career in that
industry with the trust funds, there was a 1950 trust fund,
which took care of everybody who retired prior to 1974. The
1974 coal wage agreement then changed and there was a separate
trust fund.
I haven't followed it that closely to know whether that
1950 fund is still around. I would imagine there are still some
widows that would be receiving benefits; not too many miners,
my guess would be. That is a long time for people who had that
kind of a career and exposure to the occupational illnesses
that are prevalent in that industry. But there--it may be that
those liabilities were merged into the 1974 fund at this point.
Mr. Bucshon. Could be. I just was talking to my dad over
the weekend, and his impression is amongst his retired workers
is that if they started in the coal industry before 1974 they
were okay, and that doesn't sound like that is the case. It
depends on when you retired.
So they need to--I think the--it sounds like the UMWA needs
to maybe message that to their retirees better about how
critical this is that we work with them and with you all to
make some changes that--because I think at least my dad has a
false impression of that they are going to be okay regardless
of what happens to this plan.
With that, I want to extend the question and highlight,
what will--and I will--any of the panelists--to again highlight
what will happen if Central States or UMWA's 1974 plan actually
goes insolvent, and again, highlight how bad that would be
compared to finding some solutions.
And we can start with whomever. Mr. DeFrehn?
Mr. DeFrehn. The slides, the graphic that the chairman
showed early is representative of what the PBGC trust would
look like--their liabilities--if those two trust funds fail
without any other types of intervention. I am aware that the
coal industry and members here and in the Senate are evaluating
whether or not there are some other sources of revenue from the
Coal Act that might be available to take care of some of the
problems in the coal industry and with that plan, which, as I
mentioned, had been affected by the Clean Air Act. Much of the
production was pushed to the far west and many of the jobs that
were associated with that were lost over the last----
Mr. Bucshon. I hate to interrupt, but in fact, that is----
Mr. DeFrehn. Yes.
Mr. Bucshon [continuing]. Exactly what happened to my dad's
coal mine in central Illinois, 900 employees at one time, and
now is idle with 30 years of coal sitting below the ground. But
not only what will happen to the PBGC, but as an individual
worker or an individual retiree, again, highlight the
difference of what you currently get if the plan stays solvent
but what you may get if it goes insolvent and how critical it
is to these workers that Congress really do something to try to
prevent that from happening.
Mr. DeFrehn. A worker who is receiving $2,000 a month or
$3,000 a month--if the plan were to fail, the guarantee under
the current statute would provide a maximum of $12,870 to a
worker who receives--who retired at age 65 with 30 years of
service. If either of those are reduced--if you get less than
30 years or if you retired before age 65--those guarantees are
reduced.
The formula is quite simple. It is 100 percent of the first
$11 of accrual, 75 percent of the next $33. That is what the
statute provides.
However, it has been made abundantly clear by the PBGC that
their insolvency targets--that they are headed for insolvency
with no changes. There is a 30 percent chance in their exposure
draft that that will happen by 2022 and a 91 percent
probability that they will be insolvent by 2032, which would
mean they don't have any assets other than the current premiums
that are being paid.
GAO came in behind that study and did an estimate and they
said that if you were paying benefits from current premiums the
best you could do is 10 percent of that. So instead of $1,000 a
month for that worker who was receiving $2,000 or $3,000 a
month, he would be receiving $100 a month. That is not a
guarantee. That is an illusion rather than a guarantee.
Mr. Bucshon. I thank you for that, and I wanted just to
highlight that, how critical it is for Congress to help prevent
insolvency of these multiemployer pension funds.
Thank you, Mr. Chairman. I yield back.
Chairman Roe. I thank the gentleman for yielding.
Mr. Tierney?
Mr. Tierney. Thank you very much.
I don't doubt that everybody agrees that preventing
insolvency is a critical issue here, so let me ask a question:
Is anybody contending that the trustees of these plans acted
negligently or breached their fiduciary responsibility?
Ms. Murphy. From the employer perspective, I think the
answer to that is no. The trustees have worked with the
governing laws and regulations as well as the terms of the
plans and have done everything that they could within their
power and the tools that have been available to them. I think
the point of the NCCMP proposal is to say that new tools are
needed.
Mr. Tierney. Okay. So I think that is generally the
consensus.
I see nodding heads across the board on that--maybe one
dissention, Mr. Dean?
Mr. Dean. Just--no. There is an economic shift to a
declining----
Mr. Tierney. So there were other factors, is what----
Mr. Dean. Far greater.
Mr. Tierney. One of the factors was some employers getting
out of the plan and not covering their responsibilities going
forward. What percentage of the problem is created in that
sense?
Mr. Dean. Well, in the construction economy I can speak to,
the last man standing rule, technology and innovation in
construction has resulted in less construction workers required
to do the same task that they did in the past. Therefore, we
have seen an erosion in employers, some labor laws----
Mr. Tierney. Just trying to get to what portion of the
problem is created by that----
Mr. Dean. Well, it is built in the last man standing rule
that anyone that remains active and participatory----
Mr. Tierney. I don't want to----
Mr. DeFrehn. Perhaps I could give you some clarity there.
If you look at the large pension funds, the estimate is that
they collect 10 cents on the dollar of withdrawal liability.
Most of it is through bankruptcy. Sometimes they--because of
the size of many of these employers they are too small to even
bother to go through the bankruptcy process, so it is not
proven--withdrawal liability is not proven to be the
theoretical solution that it was intended to be.
Mr. Tierney. Is there an idea or a set amount of capital,
set amount of cash that is needed to resolve this problem? If
there were such an injection of a certain amount would that
resolve this problem and going forward things would repair with
minor adjustments?
Ms. Ghilarducci. It would help this gap, because the gap
there is $5 billion. But my very detailed review of the
Teamsters plans revealed two problems. One was there was too
much faith that equities would actually provide a high rate of
return, so the funds that actually had a lot of equities
actually tend to be less better funded. The other big problem,
though, is the withdrawal of new employees, so it is actually
the shrinking of the union population in these areas.
And then also, not a revival of a lot of part-time workers.
So Western Conference versus the New England States is very
much about the renewal of new entrants; it is probably 80
percent of the problem.
Mr. Tierney. You know, it would seem to me that the worst
thing to happen here is that people will lose their pension
funds or get them reduced on this basis. I mean, that is--they
are already underfunded once they retired, and to say that they
are going to pitch in and solve this problem and the answer is
going to be they end up with a smaller pension, it just doesn't
seem equitable or fair to me at all, so I am looking for a
way--if there is an amount of money to be injected and this
would do it, have people explored other ways of raising that
capital that could be paid back later in some way that is less
onerous that allows the plans to survive?
Ms. Ghilarducci. Well, I have offered this blue sky idea,
but I think it is fair, which is to look at the employers who
are benefiting from these plans and make them pay. So an
industry tax or some kind of levy on all the employers that are
using these workforces, like the Railroad Retirement Act.
Mr. Tierney. Ms. Murphy would object strenuously to that, I
am sure.
Ms. Murphy. Yes. I mean, we have looked at the private
solution for those of us that participate in these
multiemployer plans in partnership with the union that we
believe will resolve it, and again, the benefit cuts are
distasteful to everyone but they are only for those most
troubled plans, like Central States, that simply there is no
other way out that we have seen.
Mr. Tierney. Does the taxpayer have any stake in this? You
know, I mean, we bailed out a whole pile of banks, you know, to
so-called ``keep them liquid.'' Does the taxpayer have any
benefit to keeping liquid these retirees that are going to be
so onerously affected? This a policy issue?
Ms. Ghilarducci. Oh, I have been looking at the retirement
crisis in general, and states and localities have a big benefit
to make sure that these retirees don't go into poverty or to
near-poor status. The fastest-growing group in homeless
shelters in New York are the population over 55.
So the federal government really doesn't have to bear
directly those costs of those social services, but every
governor, state legislator, and mayors are really interested in
this.
Mr. Tierney. Why wasn't that reflected in the plan, Mr.
DeFrehn? Why wasn't anything--an option involving all of those
interests in resolving this problem presented in the plan as
opposed to going right to the employees and retirees and
whacking them?
Mr. DeFrehn. Well, actually, what we referred to was trying
to keep the existing system from taking too much of the benefit
away, which is what the current law requires. Our solution was
to try to mitigate the current law's requirements by having a
earlier intervention by the trustees. We didn't get into----
Mr. Tierney. We didn't give you enough license to be more
creative. Is that what is----
Mr. DeFrehn. Pardon me?
Mr. Tierney. We didn't give you enough license to be more
creative, but you might have been able to come up with some
ideas had you been given that mission?
Mr. DeFrehn. Yes. You know, under the current rules there
is--we have seen one plan where--and let me just give a little
background here----
Chairman Roe. Gentleman's time is expired.
Mr. DeFrehn. Oh, excuse me.
Chairman Roe. Mr. Scott?
Mr. DeFrehn. Perhaps we can have that discussion later----
Mr. Tierney. Yes.
Chairman Roe. Yes. Mr. Scott?
Mr. Scott. Thank you, Mr. Chairman.
Mr. Dean, you indicated that you have to represent the best
interest of your members. Do your members notice that there
are--looking at one of the unintended consequences of reducing
benefits, if your members saw that benefits were actually being
reduced on these defined benefit plans, why wouldn't they say,
``Well, let's go for a 401(k) with a match rather than this
illusory defined benefit that may or may not be there. At least
we would own our 401(k)''?
Mr. Dean. Many of our plans have a combination of both, but
our members look for that stable, monthly pension----
Mr. Scott. That may or may not be there.
Mr. Dean. In most cases our pension plans in my industry
and within my trade are in the green zone.
We have had a distressed plan, say, in Buffalo, where the
collapse of the steel industry created an upside-down active to
retiree. The employers in the area had no construction to bid
on; the workers had no work. And that plan is right now to date
our only U.S. plan that has gone insolvent.
Mr. Scott. But----
Mr. Dean. But the issue is----
Mr. Scott. But, I mean, if they concluded that they would
be safer with a real live 401(k) rather than the better defined
benefit plan, might that have people pulling out of plans and
cause the cascade that we are kind of afraid of?
Mr. Dean. The construction industry right now relies
predominantly on defined benefit plans and it is supplemented
with a defined contribution plan as a hedge against both. The
defined benefit plans that we have offer great protections.
Unfortunately, if a plan goes insolvent, goes to PBGC, they are
destined for dramatically reduced benefits and these are our
scenarios are for the distressed plans, which is a small
percentage.
We want to be able to preserve and stabilize the existing
ones we have and look for flexibility. We are not intending to
cut benefits on all of our members' plans; we are looking to
alter benefits on plans that are headed for insolvency, and it
is a maybe 6 to 7 percent percentage of our entire workforce.
The way the current rules----
Mr. Scott. I am running out of time. I have a number of
other questions I would like to ask.
Mr. DeFrehn, when you answered the question whether or not
there could be increased payments into the fund, was that an
increase in pension plan--pension benefits or an increase in
premiums that you were talking about?
Mr. DeFrehn. I am sorry. I am not quite sure----
Mr. Scott. You asked the question whether or not increased
contributions would be a solution. Is that increased
contributions to the pension plan or increased premiums--PBGC
premiums?
Mr. DeFrehn. I think the question was directed to whether
or not the--increasing contributions by employers to the fund
would be a solution, and----
Mr. Scott. Well, what about pension premiums?
Mr. DeFrehn. To the PBGC?
Mr. Scott. Right.
Mr. DeFrehn. That is obviously going to have to be part of
the package here. There are going to be plans even under the
solution that the commission came up with that will not be able
to benefit because they won't be able to project long-term
solvency. That is a threshold requirement in order to access
these new tools. So there will be some plans that continue to
fall into that category and will ultimately become insolvent.
To the extent that the agency already has $7 billion of
recognized liabilities and only $1.8 billion in assets, there
needs to be something to address that, and obviously some form
of alternative premium structure is probably in order. We would
recommend that--and we are trying to work right now with the
agency to look at some alternatives as to how those premiums
might be restructured in order to reflect the current
liabilities.
Mr. Scott. Thank you.
Ms. Ghilarducci, can you say a--these contributions into
the plan are all invested in stocks that can go up and down and
are a corporate asset subject to bankruptcy. What would be the
problem with requiring these plans to invest in annuities that
would inure to the benefit of the employees and not--and would
no longer be a corporate asset, that way the ups and downs of
the market would be on the insurance companies, not on the
companies and ultimately the employees?
Ms. Ghilarducci. In some cases de-risking of annuities
might makes some sense, and ERISA, kind of, you know, will
allow that to happen. But in the two plans that you mentioned
and the red zone plans, they just don't have enough money to
buy from an insurance company that----
Mr. Scott. This would be----
Ms. Ghilarducci [continuing]. Hadn't lost its mind.
Mr. Scott [continuing]. Prospective, not retroactive.
Ms. Ghilarducci. No, I think that would be appropriate in
some cases. But insurance companies also at risk of default, as
well, as we have seen, so the PBGC backdrop is probably more
important for retirees than an insurance company's backstop.
Chairman Roe. Thank the gentleman for yielding.
Mrs. Roby?
Mrs. Roby. Thank you, Mr. Chairman.
Thank you all for being here today.
And, Mr. DeFrehn, I am going to start with you. Can you
explain how plans have adjusted their assumptions and
operations based on the financial downturn? In other words,
what changes have those plans made since the 2008-2009
financial downturn?
Mr. DeFrehn. What we have seen so far is there has been
very little change in the long-term assumed rates of return
among multiemployer plans. They typically fall between 7 and 8
percent. Our survey showed that about 85 percent of the plans
are in that range, with more than half at 7.5 percent.
The commission specifically looked at this, asking not just
the actuarial community, who sets those assumptions, but
economists and money managers--some of the largest firms, like
BlackRock and PIMCO, as well as consultants, what that long-
term prospects for returns would be and how reasonable those
current rates are.
One of them said probably 7 percent would be the highest
and all the rest of them said when you are looking at a 40-year
time horizon, 7 to 9 percent is certainly reasonable. So they
haven't made those changes.
Mrs. Roby. Okay. Thank you.
Ms. Murphy, we have heard complaints that some contributing
employers sometimes have difficulty finding details regarding--
detailed information regarding the plan, so can you just
explain, has that been your experience, and are there changes
that we here in Congress can make to promote transparency?
Ms. Murphy. I can. Yes, we have had some challenges and we
fully support transparency. The funds are obligated to provide
certain information under the PPA to employers. Employers have
to request it in most cases.
Many funds charge for it; the charges are not
insubstantial. And some funds don't provide it when requested.
So the change that we would ask is more standing on the
behalf of employers to be able to get the information that has
been requested.
Mrs. Roby. Some people suggest that the funding crisis
facing multiemployer plans is due to the sluggish economic
recovery, and so again, Ms. Murphy, can you tell us what
economic factors harm the plans you contribute to and maybe
what are some other factors influencing their financial status?
Ms. Murphy. Sure. Well, certainly the tech bubble of 2001
and the market downturn in 2008 were significant factors that
affected these funds, because for the most part they are highly
leveraged and highly dependent on investment returns. Those
market returns since then have helped improve some of the
funding status of these plans. One of the biggest economic
factors is, frankly, that new growth is not coming into these
plans, particularly in some industries like retail, that there
hasn't been a growth on the unionized side for retailers; and
also, the reluctance of new employers to come into these plans.
So we are having, you know, increased age of our
participants and less use that is coming into the plan, so
those are the primary economic factors.
Mrs. Roby. Thank you very much.
I yield back.
Chairman Roe. Thank the gentlelady for yielding.
Mr. Miller?
Mr. Miller. Thank you, Mr. Chairman, and thank you very
much for holding this hearing.
And thank all of you for all the hours you have devoted to
this subject, and I appreciate all the work you have done. I
just want to touch base on a couple of issues and just sort of
get some assessment of where we are.
And one is, Teresa, in your testimony you raised a--about
your service on the VEBAs and the question of what happens to
vulnerable employees and who is defined as the vulnerable
employee, and I just--I am not asking you for an answer on how
that is going to be handled, but is that still a part of this
discussion? Because obviously there are many organizations here
and we have different views from them about how this is going
to be done, and I just want to know, is that still a matter of
consideration here so we try to make sure the----
Ms. Ghilarducci. Okay, so if you are going to consider
cutting retiree benefits--and I am very sympathetic that in
some cases that is the only way these things are going to
last----
Mr. Miller. Right. I think we all understand that----
Ms. Ghilarducci [continuing]. Then the cursory language
that says vulnerable retirees have to be protected is almost
meaningless unless there is a very strong representation almost
particular to every plan and every situation. Because in the
steelworkers and auto workers cases, actually the vulnerability
had a different standard. In the auto workers it was retirees
that had less than $8,000--living on less than $8,000 a year;
in the steelworkers, they defined their vulnerable retirees as
very old. Now, there is an income-age correlation, but the
particularities of the region and also the industry actually
meant something different to vulnerable workers.
Mr. Miller. Is that discussion being had as you consider
reducing the----
Ms. Ghilarducci. The most important thing I can bring from
my experience there is all the time. We discuss benefit design
every 6 weeks, and the distributional effects of every benefit
design is what our poor actuary has to do.
Mr. Miller. I am going to stop you there.
The other question was--Randy, I think you referred to this
business that should things turn out to be great and, in fact,
the plan can gain solvency, how do you come back from that? How
do you work your way back in terms of benefits? Is that being
discussed or are avenues being developed?
Mr. DeFrehn. Yes. That was an area that we discussed and it
was clearly an area that people felt that there was some
obligation as a plan recovered its financial health to also
restore some of the benefits that were reduced, recognizing,
though, that in some of these more mature plans the liabilities
for retirees is maybe multiples of what the liabilities for the
actives would be. The decision was that perhaps a dollar
equivalency would make sense, rather than trying to restore on
a percentage basis those benefits----
Mr. Miller. But again, that----
Mr. DeFrehn. It was a discussion. It was----
Mr. Miller. That hasn't been thrown out yet. I mean, we
are----
Mr. DeFrehn. Not at all. It is certainly part of the
proposal, Mr. Miller, and there would--just to come back to the
other point, as well, the notion of vulnerable populations, as
Teresa says, it is best defined by those closest to it. The
commission was very careful to recognize that people who were
advanced ages had no ability to find other sources of income,
and yet would be of the least cost to the plans going forward
because their life expectancy is shorter.
Those populations could reasonably be taken into
consideration as the plans design their reconstruction model
here. That would be something that the PBGC would take into
consideration as they were satisfying themselves that due
diligence had been exercised, as well.
Mr. Miller. Okay.
Finally, just on the question of new plan design, where are
we in that discussion in terms of to the raises--the variable
annuities and the target benefits? Is that under active
discussion? Again, I recognize that in some cases that is a
pipedream, but in others it may be--hold out some potential for
some employers and some employee groups.
Mr. DeFrehn. Yes. It is actually very much in play. All of
the proposals--all aspects of the proposal are being advanced
as a package. We believe that they are integrally and--tied to
one another. Certainly the variable defined benefit plan has
already been adopted by I think four different groups so far.
The fact that it is a D.B. under the current structure is
really only hampered by the question of whether or not the
Treasury Department believes that the current structure is
sufficient to issue a qualification letter. I don't believe any
of those groups that have adopted it have received letters yet.
Mr. Miller. Thank you. The reason I am asking these
questions is that obviously members of Congress are starting to
get, you know, taking meetings and getting hammered in some
cases, or getting urged in other cases, whatever is going on. I
just want to make sure that these particular issues are still
open and under active discussion, that they are not starting to
close these down.
Because again, people are coming with--with very different
situations and have a different vision about how big the
catastrophe is or what the benefits will be, and I think while
members are learning some of this for the first time beyond
this committee, they have to know that this--one side or the
other hasn't closed these options down.
Mr. DeFrehn. If I might, Mr. Miller, just to respond to
that----
Mr. Miller. It is up to the chairman at this point.
Mr. DeFrehn. I am sorry.
Mr. Chairman?
I think at this point we are very close to having a formal
proposal that would be something that could be turned into bill
language that you could then--once that happens you will see
that the support is still here--very strong support among the
entire membership of the group that put this together. One or
two slight defections along the way, but a group of 42 people,
42 organizations, I think we have done a very good job in
keeping that together, and you will see that support, both
labor and management jointly, as soon as there is a bill for
them to be talking about.
Mr. Miller. Thank you. And thank you again for all of your
work. Appreciate it.
Chairman Roe. I thank the gentleman for yielding.
Mrs. Brooks?
Mrs. Brooks. Thank you, Mr. Chairman.
To Mr. DeFrehn. The commission's proposal includes
recommendations for alternative plan designs, one of which
would change the discount rate used by plans for future
accruals. What are the characteristics of those plans that you
expect would move toward that model if doing so is voluntary?
Mr. DeFrehn. Remember that there were two objectives of
this commission. One was to make sure that any changes would
result in a predictable, regular, guaranteed income for
participants. And the second was to try to reduce the
liabilities to employers.
The two models were given as examples but not exclusive in
the commission's proposal were a variable defined benefit plan,
which would reduce but not eliminate withdrawal liability
simply by using lower discount rates, and then having a
variable portion, which would create a floor benefit using
those rates, and then there would be a variable portion above
that that would fluctuate based on the market returns.
In the second model, which is known as the target benefit,
that model eliminates withdrawal liability. It has higher than
current funding standards with a requirement that the benefits
be funded on a contribution basis of 120 percent of the current
projected cost for the benefit, but because there is no
withdrawal liability the contribution that is made would have
to be managed by the fiduciaries of the plan and there would
have to be some mechanism for adjustments in that benefit as it
goes forward.
So there are very specific recommendations that we have
created along that line for a hierarchy of how those plans
could be adjusted. But the notion is that the adjustments would
be done timely and early so that there--the vulnerability of
any pensioners whose benefits were being paid would be
significantly limited.
This model is not unusual. It has actively been used by the
Canadians in--it is very similar to the Canadian defined
benefit model, which also has no withdrawal liability with the
exception of the province of Quebec.
Mrs. Brooks. How is it working for Canada?
Mr. DeFrehn. Pretty well, as a matter of fact. They have
actually changed some of their rules on solvency because some
of those were not as robust as they needed to be during the
time of the market contractions.
But it is quite similar to systems elsewhere in the world
as well as the Dutch system, which we could get into in greater
detail, but I think you can just see that we are one of the
unique--our model is unique in having withdrawal liability, and
what it is proven to do is create an impediment to the new
employers coming into the system.
If this system is to work, and if any defined benefit
system--defined benefit program is to work it requires active
engagement by the employers, and a continually shrinking pool
of contributing employers is not a good future for any plan.
Mrs. Brooks. Thank you. Thank you.
Mr. Dean, you attributed the decline in assets in the
pension fund to a twice-in-a-decade--in your testimony to a
twice-in-a-decade financial downturn, and unfortunately,
financial markets do sometimes suffer downturns at inopportune
times. For that reason, some have questioned whether or not it
is reasonable for the pension plans to automatically assume the
7.5 or 8 percent returns every year.
How can Congress provide unions and employers the funding
flexibility they need while also ensuring that future promises
and benefits are sufficiently funded even when there are
financial downturns?
Mr. Dean. Good question. Congress could look towards
allowing us, in either the two solutions of the variable or the
targeted or floor benefit going forward, which would assume a
much lower rate of return, and then as it--as there is more
income allowed you could apportion that money towards the
participant not on a permanent basis but on whatever the market
allows the portfolio to return.
The way it is presently and the previous question, when you
lower assumption rate you have to take a grundle of money to
pay down that assumption rate and it doesn't do anything to pay
for, and as the other panelists have talked about, whether it
be, you know, the annual rate is determined on not only
contributions but interest assumed, so it is not solely on
interest assumption. So, and you know, that is one direction
going forward where, if we had that leeway it would be
something that we haven't done to date.
But when we lock in the assumption rate and the benefit,
that is a benefit promise in perpetuity.
Mrs. Brooks. Thank you. I yield back.
Chairman Roe. Thank the gentlelady for yielding.
Mr. Polis?
Mr. Polis. Thank you, Mr. Chair.
My first question is for Mr. DeFrehn.
I wanted to ask about in terms of the National Coordinating
Committee, what kind of outreach have you been able to do to
both--I think you talked a little bit about some of the
national unions of workers who have, in particular, locals and
ground-level workers and unions to get their input in the final
report?
Mr. DeFrehn. The commission had both international union
representation as well as some of the local and regional plans
that were part of the discussions as we went forward. Since the
commission's report has come out we have--I have personally
spent an awful lot of time on the road briefing people about
what the objective is, what the recommendations are. And
generally speaking, I can tell you they have been well
received.
Mr. Polis. But I was more interested in the input leading
to the report as opposed to the outreach after it, but the
input leading to the report also included locals and----
Mr. DeFrehn. It did.
Mr. Polis. Okay.
And next question for Dr. Ghilarducci. You know, I think
this concept of shared sacrifice is certainly understandable,
but we also understand the importance of retirement security,
and of course, we are committed to protecting beneficiaries
whose--it is not their fault that their multiemployer pension
plans are in the shape they are in. So what kind of limitations
or protections should responsible pension reform have to ensure
that we are not throwing beneficiaries under the bus?
Ms. Ghilarducci. It is not their fault, and they also have
less options. So the commission's report has the structure of a
PBGC representative that would have to sign off on any
reduction that had to happen in these desperate situations. The
Central States may be a desperate situation.
But that--I am really worried about that representative not
actually having a more active role or being well resourced. And
also, is that PBGC representative going to actually have the
input from retirees and even on a local level for it to be
effective? So I am concerned about the governance of that
independent say.
So the courts, in these situations that I am involved in,
actually made sure I am one of the independent trustees and
then the steelworkers actually have retiree representatives on
that board, expanded that multiemployer union employer sponsor
and included a retiree representative. It is kind of an active
and fierce lawyers on these committees.
Mr. Polis. So, I think the follow-up question is for
anybody on the panel really. What happens if Congress doesn't
take any action? Where are we in let's say 10 years, in 20
years, so, I mean, 20 years, talking about people that are in
their 40s today--10 years. What happens if there is no action
whatsoever in the 10-and 20-year timeframe, whoever would like
to address that?
Mr. DeFrehn. I would be glad to start on that one.
Mr. Polis. Okay.
Mr. DeFrehn. If there is no action taken, some of the
largest plans that we just mentioned--Central States and the
Mine Workers plan--will collapse----
Mr. Polis. But what does that mean for----
Mr. DeFrehn. They will go to PBGC, the dire economic
scenario that GAO has laid out will likely take place, or this
body will be asked to appropriate large sums of money. But
either way, the domino effect across these industries, because
as you see from even the retail food industry, who contributes
to funds in different trades, there is so much
interconnectivity in the contributing employers among these
trust funds, you will see a domino effect.
Mr. Polis. And in your opinion, how soon does Congress need
to act to avoid this?
Mr. DeFrehn. As soon as humanly possible.
Mr. Polis. What is our window? How many years?
Mr. DeFrehn. I think if you get it done by next summer that
is probably the end of the--where the window closes. Had we
taken this action, or taken some action earlier to allow some
of the earlier proposals, then the benefit reductions for plans
that would be able to take advantage of these tools would not
have had to be as severe as they are--by the day as these plans
continue to spend down their assets, headed for insolvency.
There will come a time when they pass that threshold where
the test says you have to be able to demonstrate that you will
be solvent going forward. When you get to that point and they
can't meet that obligation any longer, we will have waited too
long.
Mr. Dean. If the PBGC does become insolvent due to the
collapse of the two plans, think of all the plans that are
trying to maintain its solvency and in addition pay PBGC
premiums for which they will be offered no protection. It is a
scary thought.
Mr. Polis. Do others agree we are only 12, 14, 16 months
away from that, real quickly?
Ms. Murphy?
Ms. Murphy. Yes. Time is really of the essence, and this is
the window to act now. We have been working on this for quite
some time and talking about it, and the solutions that we
propose now simply won't be effective if we wait any longer
than that. Thank you.
Mr. Polis. Thank you.
I yield.
Chairman Roe. I thank the gentleman for yielding.
And I would also like to thank the witnesses for taking
their time to testify today. You have done a great job.
And I will now yield to Mr. Miller for his closing remarks?
Mr. Miller. [Off mike.]
Chairman Roe. That is a first. [Laughter.]
That really caught me off guard.
Secondly, I would like to thank the committee.
And, Dr. Ghilarducci, I am an SEC fan. I know you were at
Notre Dame for 25 years and I was just wondering if they are
going to fill the football team next year.
Ms. Ghilarducci [continuing]. For that. They are building
their team.
Chairman Roe. I think we both sides have a commitment to
making sure or seeing that we can help solve this problem or
get it into at least acceptable for everybody at the table.
Certainly I have never seen a pension plan have a problem when
they had too much money, and I think one of the things we need
to look at in doing this is during the up years is allowing
people to, quotes--``overfund'' these plans because you have
not repealed the economic cycle. It is going to go up and down.
And when you happen to retire--and just myself personally,
I retired from my medical practice and guess what? The market
went in the tank, and so you can't pick that time out. You are
the age you retire when you retire, and I think that is--
smoothing out over time would be something we need to look at
strongly, because, like the up during the 1990s, when it was--
the market was really on the ups, it would have been great to
have stored some acorns away at that point to have to go back
later to reserves to look at.
So I would think we would look at that. I think bankruptcy,
how that is dealt with, that Ranking Member mentioned a minute
ago, I think we need to look at that.
You all have clearly stated that increasing premiums alone
does a couple things. It will help some. It will be part of the
problem, but if you do too much it will discourage and hurt
some companies and create a worse problem, so we have to be
careful with that.
I certainly think that looking at a small benefit reduction
now with protections, as you all mentioned, will prevent a huge
reduction in the future. And that is very difficult to go back
and to tell people something you promised them that we may not
be able to deliver 100 percent of that promise, but that is
certainly better than none.
And I think Mr. Polis brought out that educating the
membership is--the people that are affected--and not let rumor
mills get started is very important, and I think that is also
much so. And I think changing--I think Mrs. Brooks brought this
up, a very good question about how returns are calculated and
if--boy, if I could be guaranteed a 9 percent return I might be
looking at a new boat here pretty soon, so I think that is
something we need to look at.
And I think the new ideas--there is not any reason in the
world why we have to stay with these two models we currently
have. There is no reason for that and I am excited about the
variable deferred--defined benefit plan I think is a great
concept, and the targeted benefit also, where you can fund at a
higher rate, understanding that you don't create, then, a
barrier for people getting into a plan like that.
I think that removes that last man standing rule and that
is a huge deal when you look at UPS. It just wrote a $6 billion
check a few years ago and got out, looking at their future
liabilities.
And I know, Ms. Murphy, you mentioned in your testimony--at
least in your written testimony--about how the potential $500
million liability you may have going forward is listed as a
liability when you borrow money, people look forward, so that
holds your company back from expanding or doing what they need
to do.
We don't know what the next sector will be, but we know
during this--as Mr. Dean pointed out, technology in the mining
and the transportation industry and construction industry has
reduced the manpower that is needed to do the same job, so that
has created fewer people paying into these plans. So a lot of
problems, but I see solutions out here.
I think we are committed to doing that and I am glad to
hear, Mr. DeFrehn, you talking about we have got a window of
about a year to get this legislation up and done.
Well, that being said and no further comments, this meeting
is adjourned.
[Additional statements for the record from Mr. Andrews
follow:]
Prepared Statement of American Association of Retired Persons (AARP)
On behalf of our more than 37 million members and all Americans age
50 and older, AARP appreciates the opportunity to submit this statement
for the record on the ``Solutions, Not Bailouts'' proposal by the
Retirement Security Review Commission on Multiemployer Pension
Plans.\1\
AARP is a nonprofit, nonpartisan organization that strengthens
communities and fights for the issues that matter most to families,
including healthcare, equal employment opportunity, and retirement
security. For decades, AARP has also worked to preserve and strengthen
defined benefit pensions as well as ERISA's protections for pension
participants and beneficiaries. Defined benefit pension plans have
proven themselves to be reliable, efficient, and vital mechanisms for
ensuring retirement income security. Unfortunately, such plans
increasingly have been supplanted by defined contribution arrangements
such as 401(k)s, which shift all of the investment and longevity risk
to employees. AARP believes we should take needed steps to preserve
those defined benefit plans still in operation, explore ways of
incorporating some of their participant protections and efficiencies
into the defined contribution system, and devise innovative, improved
systems for ensuring retirement security for all.
AARP appreciates the tremendous effort and thoughtful proposal put
forward by the Retirement Security Review Commission of the National
Coordinating Committee for Multiemployer Plans (NCCMP plan), which is
the focus of this hearing. It must be recognized that some deeply
troubled multiemployer plans face insolvency within the next two
decades. If this happens, only the very low levels of insurance from
the Pension Benefit Guaranty Corporation (PBGC) for multiemployer plans
will be available--a maximum of $12,870 for a 30-year participant--and
even that amount is not guaranteed because the PBGC's multiemployer
insurance fund itself has far less than it needs to pay projected
claims. In the event that the PBGC fund runs short, participants would
receive less than the insured amount, or possibly even nothing at all.
AARP agrees that ``doing nothing'' in the face of these threats is not
a useful option.
The NCCMP proposal lays out in detail the forces, risks, and
liabilities weighing on both employers and employees in multiemployer
plans. It seeks to keep troubled plans from becoming insolvent so as to
ensure that working-age participants who are contributing to the plan
and retirees who are already receiving their hard-earned pensions
receive benefits that are above PBGC-insured levels. However, it
accomplishes solvency chiefly by granting plan trustees virtually
unbridled discretion, allowing them to cut accrued benefits for
participants, including the unprecedented step of reducing benefits of
retirees in pay status. The proposal also does not address the
shortfall in the PBGC's multiemployer insurance fund. AARP is
sympathetic to the very real challenges facing distressed multiemployer
pension plans, and the NCCMP proposal offers a good start for
discussing how best to address those challenges. However, AARP has
several strong concerns that need to be addressed before any such
proposal should be considered.
Alternatives to Cutting Accrued Benefits
If ERISA stands for anything, it stands for the proposition that
accrued benefits cannot be reduced. The law provides that future
benefits can be pared or frozen, but not benefits that have already
been earned and vested. The ``anti-cutback rule'' is perhaps the most
fundamental of ERISA's participant protections. Moreover, in the event
an employer terminates the plan, those benefits (up to a given amount)
are insured by the PBGC.
AARP understands that active employees have already shouldered
reductions in the form of increased contributions and scaled-back
benefits. According to NCCMP, employers have already increased their
contributions to the point of making themselves noncompetitive in
bidding for jobs. We are not advocating that active employees and
employers take further ``hits'' if their participation is at the
tipping point. But this does not mean that the next step should be
asking retirees to accept benefit cuts. Other than the due diligence
requirements, which are advisory in nature, the NCCMP proposal makes
cutting retirees its first resort--it is the centerpiece of the
proposal based on the assumption that plans have already done
everything else they can possibly do, and that insolvency will result
in benefit cuts for retirees that are even deeper than those proposed
by NCCMP.
What is missing from the NCCMP proposal is an explicit recognition
of the considerations that argue against cutting benefits for retirees
or near-retirees. Historically, there is a broad consensus that any
plan modification that leads to benefit reductions should protect (hold
harmless) retirees and near-retirees (e.g., those within 10 years of
retirement age). For good reason: those in and near retirement are
either already relying on that income, which is usually modest in
amount, or have already made plans in reliance on that income. In the
case of retirees, they do not have any meaningful opportunity to return
to the workforce or somehow generate new sources of income; in the case
of near-retirees, they are deemed too close to retirement to be able to
effectuate any significant change in career or retirement plans. It is
widely viewed as simply unfair to change the rules of the game people
have relied upon throughout their working careers.
Accordingly, other alternatives should be fully explored and
deployed as an alternative to cutting anyone's accrued benefits.
Moreover, because retirees generally cannot return to work and lack
other options for generating lost income, cutting benefits for retirees
in pay status should be the absolute last resort. AARP believes that
alternative measures should be considered and pursued rather than
considering abrogation of the anti-cutback rule, including (not in
priority order):
Mergers and Alliances--AARP agrees with NCCMP that mergers
and alliances with healthy plans should be encouraged, and not only for
small plans. Yet, the NCCMP report states that although many smaller
troubled plans could benefit from mergers with healthier plans, funding
rules under the Pension Protection Act of 2006 (PPA) and the PBGC's
recently restrictive interpretation of its authority are barriers to
allowing this to happen. To the extent that overly narrow
interpretations of its authority are getting in the way of this
potentially helpful strategy, AARP agrees that the PBGC's authority to
facilitate mergers and alliances prior to insolvency should be
affirmed.
In addition, as an alternative to reducing accrued benefits, it
would be worth exploring whether multiemployer or single employer plans
with overlapping sponsors might be able to share participants or assets
in a way to so as materially assist troubled plans and still protect
participants. Normally, the exclusive benefit and fiduciary rules would
and should prevent transfers of assets from one plan to another;
however, under very narrow circumstances, limited transfers of assets
between one employer's plans have been permitted with the goal of
helping preserve benefits for retirees.\2\ Some employers and unions
participate in more than one plan, some of which may be healthy and one
of which may be distressed. To the extent that any given employer and/
or union participates in more than one multiemployer plan, and if it
would actually be effective and make a difference, the possibility of
transferring participants from one plan to another should be considered
in order increase the base of contributing active participants or
otherwise protect retirees. The same might apply for employers that
sponsor a healthy single employer plan as well as participating in a
distressed multiemployer plan.
Certainly, healthy plans should not undertake steps that would put
the better-funded plan at risk of underfunding. However, to the extent
pooling assets and liabilities in this way might work to save a portion
of at-risk participants from cuts in accrued benefits, this step should
be considered.
Partition--The PBGC has rarely used its authority to
partition the benefit obligations of employers who failed to make
contributions or went bankrupt.\3\ Assuming that the PBGC had the funds
needed to partition off and cover participants whose employers no
longer contribute, this step could improve the solvency of the plan for
remaining participants. In the case of deeply troubled plans, though,
it is unclear whether this remedy would be sufficient to restore
solvency, because other factors have also contributed to the distress
of these plans. Moreover, this strategy doesn't avoid benefit cuts, at
least for those partitioned into the PBGC-assisted plan. However,
partition might help staunch concerns about further withdrawals from
the plan.
Increased Funds for the Plans and for the PBGC--The NCCMP
report is called Solutions, not Bailouts. Pension plans, and the PBGC,
are set up to be self-financing, without the need for federal funds.
And for the most part, they have been. Some of the same plans that are
so troubled now were adequately funded at the beginning of 2008, when
the financial meltdown decimated business and jobs for many of the
industries such as construction that sponsor multiemployer plans. The
meltdown also led to steep losses in plan asset values and returns, and
it produced the need for an extended, stimulative, low-interest rate
environment, which is placing inflated funding obligations on
employers. Given the role played by large banks and investment houses
in creating the financial meltdown, steps can be taken to require them
to also help distressed multiemployer plans.
Low-interest loans by the large banks and investment
funds--Until jobs and higher interest rates return to a certain level
that helps these plans regain their financial footing, the banks and
investment houses that received TARP funds could be required to make
long-term, low-interest loans to them at the same Federal Reserve
discount rate they use to loan each other funds.
Public guarantee of private loans--Normally, the PBGC's
assistance to insolvent multiemployer plans consists of providing loans
to the plan so that it can pay benefits, but at lower, PBGC-guaranteed
levels. Then, when and if the plan becomes solvent again, it is
required to repay the PBGC. Previous hearings have explored whether
there might be a way to bring investment banks or hedge funds into this
picture, to provide federally guaranteed loans to plans earlier so as
to stave off insolvency due to cash flow issues, or even a federal
credit facility that would infuse funds to help offset the
contributions that employers are having to make for orphans and others
in the plan for whom an employer is not contributing.\4\ The NCCMP
proposal puts forward the idea of federally guaranteed bond offerings
that companies could use to pay off their unfunded legacy costs.
Options such as these should be fully considered before the hard-
working employees and retirees who rely on these plans should be asked
to accept cuts in accrued benefits.
Increased PBGC premiums--Aside from measures taken to
shore up troubled plans, there also need to be measures to bring the
PBGC's multiemployer plan insurance fund back into balance, capable of
handling its projected liabilities. There is no getting around the fact
that the PBGC needs additional funds. Premiums were recently increased
in the MAP-21 legislation, but are set at the still-too-low level of
$12/year per participant beginning in 2013--about what it costs to go
to a movie. These premiums are inadequate to cover the PBGC's
liabilities. They also yield insurance levels that are too low to
provide retirement security to participants.
According to the PBGC, raising premiums to $120/year per
participant would reduce the probability of the PBGC's insolvency by
2022 down to zero,\5\ at least for plans now on the PBGC's books. The
NCCMP plan insinuates that employers cannot bear additional costs such
as premium increases of this magnitude without triggering withdrawals
and other severe consequences. However, faced with the threat of being
forced to accept benefit cuts of one-third or worse under the NCCMP
proposal, it is quite possible that retirees and other participants
might find it less onerous to be required to pay those premiums. For
example, if all of the more than 10 million participants in
multiemployer plans were required to contribute $250 per year, it would
raise more than $25 billion dollars over the next 10 years, thereby
closing the PBGC's deficit and financing more adequate levels of
insurance without imposing additional costs on employers. In the past,
some retiree health plans have started to charge premiums or exact
other forms of cost-sharing of retirees, even though the plans were
earlier offered as requiring no contributions from retirees.\6\ As
compared to the alternatives, participants might welcome the chance to
better insure their pensions, especially if they would receive higher
levels of insurance protections.
The alternatives discussed above represent ``outside the box''
approaches to addressing the challenge of insolvent multiemployer
plans. But, so is the NCCMP proposal. As long as such approaches are on
the table, AARP urges that all due consideration, and priority, be
given to those proposals that would prevent drastic benefit cuts for
participants, particularly any cuts to those in pay status.
Cutting Accrued Benefits
The NCCMP proposal attempts to balance many competing interests: to
keep active workers willing to contribute in exchange for the promise
of a decent benefit in retirement; to keep employers willing to
continue (or new ones to begin) their participation, yet avoid raising
their costs too high to maintain their competitiveness; and to preserve
benefit payments above levels that would ensue if the plans became
insolvent. However, in addition to its failure to require alternatives
to cutting accrued benefits, the NCCMP proposal contains two other
fatal flaws: it grants too much discretion to plan trustees, and it
fails to provide adequate protections for participants, especially for
retirees. Consequently, AARP believes that changes are needed before
consideration of the NCCMP proposal.
Unbridled Discretion
At the outset, the NCCMP proposal states that certain criteria
would need to be met before a plan would be eligible to cut accrued
benefits. It would need to be so distressed as to face a projection of
insolvency in 20 years or less, the cuts in benefits must fix the
problem and restore solvency, and the ``plan sponsors and trustees
[must] have exercised due diligence in determining that suspensions are
necessary, including having taken all reasonable measures to improve
the plan's funded position.'' \7\
What constitutes ``reasonable measures'' is not specified, but
would seem to be encompassed within the list of ``illustrative''
indicators of ``due diligence,'' i.e., considering factors such as
contribution levels, future accrual levels, the impact on ancillary
benefits, etc. Yet, having granted that plans should be required to
exercise due diligence to be eligible to take drastic actions, the
proposal then provides that ``it is impractical to develop a precise
and complete list of quantitative tests to measure the due diligence of
the sponsors and trustees. * * *'' \8\ This same ``illustrative'' list
of what constitutes due diligence is the basis for the limited
parameters allowed for PBGC review and approval.
The plan, as proposed, grants too much, virtually unbridled,
discretion to plan trustees. Nothing is required. No priorities are
established. AARP understands that plan designs and terms can vary
widely and that plan trustees may need to have some flexibility to
fashion the measures that will work best for their stakeholders and
participants. However, pension plans are not so different from one
another that ``all reasonable measures'' cannot be anticipated and
required, or that steps that constitute and are relevant to a finding
of ``due diligence'' cannot be specified.
Moreover, the proposal does not appear to recognize that the
trustees may have possible conflicts of interest between protecting the
active employees, who are contributing to the plan, paying union dues,
and voting for union leadership; the deferred vested employees, who no
longer contribute, pay dues, or vote; and the retirees, who may no
longer contribute or pay dues, and may not have a vote or
representation among the plan trustees. In failing to differentiate
among various groups of participants with competing interests, it also
fails to provide any appropriate procedural and substantive protections
against conflicts of interest.
The inclusion of an ``approval process'' by the PBGC, as outlined,
does not compensate for these problems, as that process is itself
inadequate. First, the entire scheme fails to acknowledge that the PBGC
is not a disinterested watchdog in this context. If plans become
insolvent, the agency is on the hook to pay benefits, and at present,
it has insufficient funds to do so. It is in the interest of the PBGC
to do all it can to prevent the plan from becoming insolvent; it has no
incentive not to approve the trustees' plan. Second, even if the PBGC
were not so incentivized, its assigned scope of review is limited to
whether the plan trustees exercised due diligence. Yet, as stated
above, ``due diligence'' is simply a list of considerations, not a
defined set of duties that provides a basis for any real measure of
accountability. The plan also calls for PBGC approval of the
distribution of suspensions, taking into account ``equitable''
distribution across populations and ``protections'' for ``vulnerable
populations.'' \9\ However, these terms, too, are undefined. Third, the
PBGC must defer to the plan's decisions ``absent clear and compelling
evidence to contrary.'' It is difficult to imagine what evidence would
be sufficient, given that plan trustees are not required to do anything
or have their decisions comport with any substantive standards, other
than to achieve eventual solvency. Finally, if the PBGC fails to
approve the plan within six months, the plan is ``deemed approved'' and
in accordance with fiduciary standards, possibly preempting challenges,
or at least creating a presumption of compliance. The entire process
amounts to little more than a rubberstamp of the trustees' decision.
Several changes are needed to address these deficiencies. First and
foremost, ``all reasonable measures'' and ``due diligence'' cannot be
whatever the trustees say they are. To prevent reductions in accrued
benefits, it would be entirely appropriate to require certain steps be
taken first. In addition to the alternatives already discussed, AARP
believes that the standard steps should be required, such as cutting
``extras'' that are not part of accrued benefits (e.g., 13th checks to
retirees), and paring future accruals. Moreover, the due diligence
element needs to be strengthened by requiring trustees to follow
certain specified standards and procedures. That is not to say there
needs to be a one-size-fits-all list, every item of which is required.
However, there should be a list of standards and priorities, based on
longstanding principles of fairness and ERISA, which should apply.
Adherence to that list of standards, considering the facts and
circumstances in which the plan finds itself, should be considered the
measure for determining whether the trustees did or did not exercise
due diligence.
There also needs to be a stronger, more independent approval
process. First, the PBGC's scope of review of the trustees' plan should
be broadened to all relevant factors weighing in favor and against
adoption of the plan, including but not limited to strengthened
standards of due diligence.
This review should preferably be done with the required approval of
someone with some independence, such as the newly created Participant
and Plan Sponsor Advocate, who is charged with advocating for ``the
full attainment of the rights of participants in plans trusteed by the
corporation,'' \10\ or in this case, plans at risk of being trusteed by
the corporation. AARP agrees with NCCMP that the agency should be given
a time limit for acting; the PBGC will need to weigh in on the question
of whether six months is reasonable and appropriate. However, we are
uncomfortable with the notion of deemed approval by default, especially
when people's benefits are at stake.
AARP is open to other alternatives. Perhaps the plan could be given
the right to seek a time-limited review by the Employee Benefits
Security Administration, or an independent third party, in order to
better ensure approval within a defined time limit.
Inadequate Protections for Participants, Especially Retirees
AARP is also extremely concerned that the NCCMP proposal is
substantially lacking in participant protections, especially for
retirees. We start with the fact that consideration of retirees appears
nowhere in the list of ``illustrative'' factors that would be used to
determine due diligence! The plan's trustees, and then by design the
PBGC, are not called upon by a single factor to weigh the impact of the
solvency plan on retirees. Moreover, it seems to us that the due
diligence factors that are listed appear to tilt toward cutting
benefits for retirees. Clearly, the kind of substantive standards of
fairness and ERISA that AARP believes should be required as part of any
measure of due diligence would and should include the historic
protections afforded to participants who are already retired and in pay
status.
In addition to omitting any consideration of retirees, the plan
makes no differentiation in treatment between different groups of
participants and beneficiaries. This is also a fatal flaw. There is
nothing to prevent the trustees' plan from treating retirees or near-
retirees more adversely than it treats newly vested participants, for
example. The only allusion to differentiation in the proposal appears
in the provision regarding the distribution of benefit suspensions.
There, the proposal specifies that benefit cuts should be distributed
``equitably'' across the participant population, and that undefined
``vulnerable'' populations should receive unspecified protections.
These objections regarding lack of regard for retirees and near-
retirees are not ones of the tail wagging the dog, or allowing concerns
about the vulnerable to overwhelm the bigger proposal, as some have
suggested. This is a huge problem with the bigger proposal. It is not
very meaningful to cordon off a ``vulnerable'' group as if they are a
small part of the population, when the median multiemployer pension
benefit received by retirees is so modest: only about $8,300/year in
2009.\11\ If, in fact, most of the participant and beneficiary
population in multiemployer plans are receiving relatively small
pensions of well under $10,000/year, AARP would contend that most
retirees would qualify as ``vulnerable'' and unable to bear any benefit
cuts whatsoever.
AARP recognizes that retirees and near-retirees could be hurt the
worst in the event plans become insolvent. However, the NCCMP proposal
must be modified in several ways. First, consideration of the status of
retirees must be an explicit factor that is part of any evaluation of
due diligence and fairness. Second, the plan should differentiate among
groups of participants. There needs to be an established order of
priority in how any proposed benefit suspensions would be handled in
order to protect retirees in pay status, as well as near-retirees. This
ranking should be mandatory/statutory. Third, any benefit cuts should
also be expressly limited, perhaps according to a formula based on age
or income, or limited on a sliding scale based on the size of the
pension, e.g. there can be no cuts to those with benefits of $10,000 or
less, or limits on cuts for those of higher age. Certainly, benefit
protections that are only 10% higher than the amount provided by the
PBGC in the event of insolvency is not much protection, and should be
much higher.
AARP agrees that cuts in optional, adjustable, or ``ancillary''
benefits should come before consideration of cuts in core pension
benefits. However, AARP disagrees that benefits for surviving spouses
(the 50% qualified joint and survivor annuity), or former spouses/
surviving spouses who have received a court-ordered share of a
participant's pension, are ``ancillary'' benefits. These benefits were
part of deferred compensation, jointly earned and jointly owned by both
partners in the couple. They are considered part of the core benefit,
and respect for these beneficiaries' rights are a condition of the
plan's tax-qualified status. The NCCMP proposal does not state exactly
how it would affect the rights of beneficiaries, or how, for example, a
qualified domestic relations order that orders payment of a particular
dollar amount would be fulfilled. AARP would maintain that the benefits
of beneficiaries should be handled in a way that is congruent with the
benefits of the participant. For instance, if the participant's
benefits are reduced by 15%, so should the benefits of the beneficiary;
the cuts to the beneficiary should not be larger.
AARP agrees with the proposal's provisions that any suspension of
benefits ``must achieve, but not exceed,'' the amount needed to achieve
solvency. However, should such a proposal be adopted, we would take
issue with the framing of another stated limitation. The proposal
specifies, presumably after the plan achieves solvency, that any future
benefit improvements ``must be accompanied by equitable restoration of
suspensions, where the liability value of the improvement for actives
cannot exceed the value of the restoration for retirees.'' \12\ Should
retirees' benefits be reduced, it is insufficient to specify that
improvements or restorations of benefits for active participants cannot
exceed the value of restoring benefits to retirees. Under such a plan,
it should be an absolute requirement that once solvency is achieved,
the benefits of retirees are restored first, before there is any
improvement or restoration of benefits to active participants. Once all
suspended accrued benefits have been restored in full to retirees,
improvements to the benefits of active participants would be permitted.
In summary, AARP believes we should not cut anyone's accrued
benefits, especially those of retirees and near-retirees; other
alternatives should first be explored and implemented. If Congress is
committed to consideration of proposals to permit reductions, cuts to
retirees and near-retirees should be the last resort, and severely
limited in scope and amount. We do not countenance vague assertions of
protections for vulnerable populations. Nor do we consider statutorily
required benefits for surviving spouses and former spouses to be
ancillary. Protections for these groups must be strong and explicit.
Finally, before any future improvements in retirement benefits should
be permitted, any benefit cuts for retirees should be required to be
restored in full. In fact, periodic reviews of the implementation of
any plan that includes accrued benefit reductions should be mandatory
to determine whether solvency has been achieved and/or whether prior
cuts could be partially restored.
There can be no doubt that the current proposal is contrary to one
of the most central and fundamental tenets of ERISA, and would be a bad
precedent for pension law generally. AARP also has no doubts that such
a precedent would encourage other efforts to cut back accrued benefits.
To prevent any further erosion of pension law, any proposal that
advances should make clear that the measures permitted are confined
only to the unique and difficult circumstances currently faced by
multiemployer plans. Moreover, Congress should consider restricting the
plans eligible to propose these unprecedented measures. Plans that are
operating at a deficit but have 15-20 years until they face insolvency
might be able to obtain low-cost financing or take steps that would
significantly ``bend the curve'' away from insolvency, thereby
lessening the need for more draconian measures.
Other Issues in the Proposal
The NCCMP proposal also proposes allowing plans to ``harmonize''
their normal retirement age with those of Social Security, as a way of
strengthening the system.\13\ Private sector pensions are barred from
raising their retirement age for full benefits past 65.\14\
AARP would caution against this proposal for several reasons.
First, the types of jobs held by participants in many multiemployer
plans are physically demanding and/or are performed under difficult
working conditions. Many of their participants will not be able to work
until age 65, let alone later. It is for this very reason that many
unions have been among the most ardent opponents of raising the early
retirement age in Social Security above 62 and of raising the full
retirement age beyond the levels already made in the 1983 changes.\15\
Second, most pension plans already provide for actuarially reduced
benefits in the event of early retirement. Raising the full retirement
age in pension plans would have the same effect as it has in Social
Security: to further reduce the benefits the participant receives, for
life. Third, there would be no way to limit this change to
multiemployer plans on the brink of insolvency. Finally, especially for
those with physical disabilities or illness that prevents them from
working longer, being able to collect a full pension at 65 enables the
pensioner to make it until 66 or 67 when they can collect their full
Social Security, in order to maximize what may be a small retirement
income. AARP believes that retroactively increasing the retirement age
for pensions, as is proposed, would impose an undue hardship.
AARP does believe that there needs to be better ways of handling
bankruptcies by employers who sponsor or participate in pension plans.
Currently, employers can use bankruptcy to discharge their pension
liabilities and to foist payment responsibilities onto others.
Employees and pension participants should stand first in line among
creditors in a bankruptcy court. AARP does not have specific
suggestions for addressing the problem of withdrawal liability facing
multiemployer plans, however, we agree that action is needed to protect
against excessive liability for orphans and other disincentives on
remaining employers.
Finally, the NCCMP report puts forward some proposals for the
redesign of pension plans in the future. AARP has not analyzed nor do
we take a position on those plans here. However, AARP applauds the
efforts of NCCMP and many others who recognize the unique value of
defined benefit plans for both employers and employees, and recognize
the importance to retirement security of best maintaining them.
Conclusion
AARP agrees the NCCMP proposal attempts to address real problems
faced by multiemployer plans, and appreciates its attempt to ensure
everyone comes out better than they would under insolvency. However, we
are not convinced that alternatives to cutting accrued benefits--a
fundamental protection under ERISA--have been adequately considered. We
are convinced, however, that at the very least, more protections for
participants and beneficiaries must be included to ensure the proposal
is a preferable alternative to insolvency.
endnotes
\1\ R. DeFrehn & J. Shapiro, Solutions not Bailouts: A
Comprehensive Plan from Business and Labor to Safeguard Multiemployer
Retirement Security, Protect Taxpayers and Spur Economic Growth
(National Coordinating Committee for Multiemployer Plans, Feb. 2013),
available at http://www.solutionsnotbailouts.com/splash [hereinafter
NCCMP Proposal].
\2\ See e.g., I.R.C. Sec. 420.
\3\ See, Challenges Facing Multiemployer Pension Plans: Evaluating
PBGC's Insurance Program and Financial Outlook 8, (Testimony of Joshua
Gotbaum, PBGC Director, before the Health, Employment, Labor and
Pensions Subcommittee of the House Committee on Education and the
Workforce (Dec. 19, 2012)), available at http://www.pbgc.gov/Documents/
PBGC-Testimony-Multiemployer-Plans.pdf.
\4\ See e.g., Assessing The Challenges Facing Multiemployer Pension
Plans 39-40, 51, Hearing before the Health, Employment, Labor and
Pensions Subcommittee of the House Committee on Education and the
Workforce. (Transcript) (June 20, 2012), available at http://
www.gpo.gov/fdsys/pkg/CHRG-112hhrg74621/pdf/CHRG-112hhrg74621.pdf.
\5\ PBGC Insurance of Multiemployer Pension Plans: Report to
Congress required by the Employee Retirement Income Security Act of
1974, as amended 6 (Jan. 22, 2013), available at http://www.pbgc.gov/
documents/pbgc-five-year-report-on-multiemployer-pension-plans.pdf.
\6\ See, Employee Benefits Security Administration, U.S. Dept. of
Labor, Can the Retiree Health Benefits Provided By Your Employer Be
Cut?, available at http://www.dol.gov/ebsa/publications/retiree--
health--benefits.html.
\7\ NCCMP Proposal, supra n. 1, at 24. AARP reads this last
criterion as requiring plans to have already taken ``all reasonable
measures'' before determining cuts are necessary; to the extent that it
does not, it should be modified to do so. Every plan should consider
other measures rather than consider cuts to accrued benefits.
\8\ Id.
\9\ Id.
\10\ Moving Ahead for Progress in the 21st Century (MAP-21), Pub.
L. No. 112-141, 126 Stat. 405, 856, Sec. 40232 (2012).
\11\ See, GAO, Private Pensions: Timely Action Needed to Address
Impending Multiemployer Plan Insolvencies 32 (March 5, 2013), available
at http://gao.gov/assets/660/653383.pdf.
\12\ NCCMP Proposal, supra n. 1, at 25.
\13\ NCCMP Proposal, supra n. 1, at 23.
\14\ 29 U.S.C Sec. 1056.
\15\ See e.g., International Brotherhood of Teamsters Resolution on
Social Security/Medicare (July 1, 2011), available at http://
www.teamster.org/content/social-securitymedicare; AFL-CIO, What Is
Social Security? available at http://www.aflcio.org/Issues/Retirement-
Security/What-Is-Social-Security.
______
Prepared Statement of the Pension Rights Center (PRC)
The Pension Rights Center is a nonprofit consumer organization that
has been working since 1976 to romote and protect the retirement
security of American workers and their families. We commend the
Subcommittee for holding this hearing. Multiemployer pension plans
provide an essential source of retirement income to millions of
Americans. The benefits paid by these plans, combined with Social
Security benefits, have allowed hard-working Americans to enter
retirement with the confidence that they will be able to maintain a
reasonable standard of living for the remainder of their lives.
Despite the success of the multiemployer system for so many people,
there are now a small but significant number of multiemployer plans
that face substantial financial issues that must be addressed. Some of
these plans were adequately funded not long ago and some of them may
find themselves in improved financial shape at some point in the future
simply because of changes in the economic climate. But the issue today
is how to shore up these plans to minimize the calamitous economic
consequences of plan insolvency to current and future retirees.
The National Coordinating Committee on Multiemployer Plans (NCCMP)
has produced a document that has started a valuable dialogue on this
important subject. Their report, Solutions not Bailouts, includes many
innovative ideas relating to the future of multiemployer plans,
including the idea for alliances and clarifying PBGC's authority to
facilitate mergers; the possibility of discontinuing a 13th check in
certain industries; a proposal to help certain widows unfairly denied
survivor's protections; and recommendations to foster innovative plan
designs.
But we are deeply troubled by the document's suggestions for
deeply-troubled plans, which endorse the unprecedented and dangerous
step of allowing plans to slash the benefits of men and women already
in retirement and who have no opportunity to replace lost benefits.
This proposal would surprise the 1974 Congress that wrote ERISA and
thought that in doing so had put a permanent end to broken promises and
disappointed expectations for retirees.
The NCCMP contends that its proposal will result in shared
sacrifice, but we are concerned that most of the true sacrifice will be
borne by those who have already retired. Multiemployer plans should not
balance their books on the backs of their retirees.
The rationale underlying the NCCMP proposal for deeply-troubled
plans is that cutting some retiree benefits now will prevent the
necessity of larger reductions later should the plan fail.\1\ This is
not, however, necessarily true for all retirees. Under current law, the
plan would pay every dollar of promised benefits to those retirees who
die before plan insolvency, which might not occur for 15 or 20 years,
or more.\2\ Retirees who are 80 or 85 years old will simply not be able
to pay for utilities, medical expenses, and other daily necessities if
their benefits are cut.
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\1\ The NCCMP proposal would allow the trustees of a plan, subject
to minimal review, to cut benefits to 110% of PBGC guarantee levels.
The maximum guarantee for a retiree with 30 years of service is $12,870
a year. As a recent Wall Street Journal article noted, a retired truck
driver now receiving a pension of $36,268 a year, would have his
benefit reduced to $13,200, a loss of $23,028 a year. Kris Maher,
``Union-Employer Proposal Would Hit Some Retirees,'' April 12, 2013.
\2\ Under current law, benefits are not cut to PBGC guarantee
limits until plan insolvency.
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For such retirees, the NCCMP proposal is all pain and no gain.
Pension policy and pension law has long recognized that retirees
deserve the strongest protection. Such individuals typically cannot go
back into the job market to make up lost pension income. Benefit
reductions would force many retirees into impoverishment. And the law
reflects this. Under Title IV of ERISA, plan assets are effectively
paid first to those who have already retired (or could have retired),
both in single and multiemployer plans. Moreover, long before ERISA,
orthodox plan design generally allocated the assets of insolvent plans
first to the benefits of people in pay status, recognizing their
particularly vulnerable status. The NCCMP proposal abandons this key
principal of pension policy.
The proposal refers to vulnerable populations, but does not
adequately protect retirees. It leaves the decision to cut benefits to
the discretion of the trustees, who often will have their primary
allegiance to active workers, contributing employers, and the long-term
continuation of the plan. Moreover, although the factors the trustees
are directed to consider include ``compensation level of active
participants relative to the industry, competitive factors facing
sponsoring employers, and the impact of benefit levels on retaining
active participants and bargaining groups,'' these standards say
nothing directly about protecting retirees.
Even worse, the proposal provides that the trustees' decision will
be final unless the PBGC affirmatively rejects the decision within a
180-day period, and that the PBGC can only reject the decision if the
trustees have failed to use ``due diligence.'' In judging whether the
trustees have used ``due diligence,'' the PBGC must grant deference to
the trustee's decision to reduce benefits ``in the absence of clear and
compelling evidence to the contrary.'' This is an unacceptably
inadequate standard of review. There is the further fact that the PBGC
itself has an institutional interest in approving benefit reductions to
lessen the likelihood that it will be required to provide financial
assistance to the plan.
There is no question that a number of multiemployer plans are in
serious financial trouble, and we very much appreciate the hard work of
NCCMP's Commission members in developing their recommendations to
address this issue. However, we also believe that there should be
exploration of alternatives to the severe retiree benefit cuts that
would be allowed under the Commission's proposal. We are currently
working with our Retired Fellows (who include former top PBGC
officials), our board of directors, and advisors to develop new ideas
that would protect retirees--as well as their multiemployer plans, and
the long-term health of the PBGC. Once we have completed our
deliberations, we will be pleased to share our ideas with the
Subcommittee.
______
[Whereupon, at 11:29 a.m., the subcommittee was adjourned.]