7 6 58 2 o Companies can control the flow of money in£o pension funds because of the Witness: Dallas L. Salisbury, President, Employee Benefit Research Institute, flexibility ERISA allows in amortizing plan liabilities. Many plans 2121 K Street, N.W., Suite 860, Washington, DC 20037-2121, (202) who subsidize them through the PBGC premium, and exposes both beneficiaries Neverthe In the continue less,long run, giving in howe most vbenefit er, cases, the incre federal ases on6oinE treaas fter ury liabilico plan tyuld wfunding ell will becomlihas ekelyinvbegun olve exceed d ifto Actu The of the arial waiver president's next. Assumptions 659-0670 applications For this Economic reand ason in Report Funding excess most goes plans ofon$2uto semillion, explain, an interest and "Theemployers rat companies e representative applying most likely for of PBGC's deficit should worsen and if the appropriate premium increase were waivers ter and _uination-bas pdeterior articip must aa iste nts notify and, toliab potenti iunder lity.employee al ERISA, benefit Consequently org can anizations. losses. fund , these ongoingincreases IRS liability must over consider is 30moye rears--for written likely to longabuse term PBGC expectations pension insurance rather than are current those doing year poorly. returns. Companies This approach losing T-52 "smooths" neither to bea less declining politically the than flow findustry, ully of feasible fucontributions nded.a very Th nor islong fact desirable. andtime does is period. gener notally In necessa that Yet, ri termed ly this sense, su "conserv gg flexibility est itative." that is not the is money Government opinions enjoyof and no alltax parties privbenefits ate interested regul from atoryfully Chart inbodies afunding 1waivercontinue pension applications. plans to take andDespite are note also of theless new the Chairman Pickle and Chairman Jones, we wish to commend you for your continued Supplemental Sheet: June 24 hearing on Pension Plan Underfunding law, pens Recent inconcei ion one the vable legislation of system PBGC theis that primary istill s general will in left re dan amake sons ger rat evenues risk oit public r more that by could the and difficult penbe waiver sipriv on tapped ate fund process. for employers into g plans help is finance weak. have to terminate been Add PBGC, iwilling tionaljust and import likely Some pursuit ance plans, toofbeofthe able however, actu policy to arial deliver shift issues assum onptions. from pension surrounding this promises Recent practice the legisl with nation's when ative company difficult retirement acassets." tions economic --in Other cthe ome raises substantial revenue for PBGC. But it doesn't cure the problem of studies conditions employe as they r confirm have contrib face ubeen tions them. that tapped companies and for additional in Social financial investment Security, difficulty Railroad returns arewill Retirement, the have most acc likely rCi ued vil requirement system, to sponsor and in we H.R. defined are 3838 honored benefit thattokey pension provide actuari plthe aalns. committee assumptions with be our reasonaanble alysisstaof nding the Defined Benefit Pension Plans with 1,000 or More Participants: Percent underfunded pension plans, and another round of premium increases and further ones befo Service re toallRetirement, underfund of the ongand a oingpension others. obligations plan and fall shift due. risk to the PBGC. But the In afunding lone, practice, raissues ther pension th associated an infunding thewith aggreg rules private ate allow (current pension considerable pl law) ans --inflexibility, athe nd the United new StFASB in ates. part rulesto Fully Funded for Accrued Vested Benefits and Total Accrued Benefits accomodate refomms may the be expected. very diverse situations of the employers sponsoring plans. The mrelationship Notwithstanding oay De result clining inofemployment more pension the uniform effect funding in certain interest of to interest corporate indu rastries tes rate across profitability mayassumptions, also plans lead inandtvoavailable aluing tax underfun liability pension ding, data Chairman Pickle and Chairman Jones, we wish to commend you for your continued MeasurinK FundinK Adequacy underscores actual liabilsince ities. amount theanother These of declining an changes employer's potential ratio mayof ,contributions economic participants however, rele ason awill dto to beneficiaries depend forlargeunderfunding upon annualthe increases assumption actuarial -- the or indicate Impact of that, Underfunding on average, on Pensioners termination-basis and Active funding Participants levels of pension plans In particular, we are restricting our remarks to the question of underfunding pursuit of the policy issues surrounding the nation's retirement income cost The employer's pending method it tax pension chooses reform costs, tobilluseparticularly would and, in make certain ch ifanges thecircumstances, plan in the has rules not the been governing funding fully overfunding have cof hanges pension risen rather -- plans. overnamely thanthe"smoothing," Inthe last keeping concerns several with and of years. could corporate EBRI'sactu Our standard ally finance. analysis makepolicy, interpret of various weation will surveys not of the be system, and we are honored to provide the committee with our analysis of the actuarial assumptions. Five-year vesting, if adopted by the House, will cut true To restate funded funded , up ist nto atus so that mewhat ofpoint. the differpension ent tersmys, stem themorediffediffi rencescult. between The results these two of making conducted instrument Generally,recby omm employed. ERISA ethe ndations Wyatt requires Even Company, or advo PBGC thecating minimum Johnson to insure anyand and parHiggins, maximum ticular "basic" constraints policy vGreenwich ested position. benefits Associates, are generally upRather, toanda funding issues associated with private pension plans in the United States. maximum. down on some PBGCof is the also accrued authorized benefit to losses insureexperienced nonbasic by benefits active participants but has not approaches to measuring funding adequacy it might be helpful to use a Companies expressed BEA signifi we will Associates cant strive in canchterms acontrol nges alltopoints ofprovide inthe theinvestment to actuarial flow the the of rising Committee money ret cost urns, level method into with of forpension used pension anexaanalytical mple, by funds the funding is employer. because shown framework measuredby of Anyonthe the for ofa in terminating underfunded pension Statement plans. Other recent developments warrant termination several Conclusion stock-and-flow actuarial basis. concept. methods (See EBRI Inmay a Issue sibe mplifiselected edBrief way, #54, if tepp. the rminati8-9 actuary on for fundin details.) certifies g is the that Charts stock thei pflexibility making opted attern toits ofdoown ERISA de soc.lining evaluation allowsannuin aof l amortizing this contributions. important plan question. liabilities. This is largely Many plans due tocontinue rising In particular, we are restricting our remarks to the question of underfunding continued attention of Congress, such as the reaction of corporate pension i ofnvestment assets on returns hand. and The in quest creaising on then actuari is:al Does assumptions. the plan have Data enou from gh Greenwich assets to and giving method2, and benefit basedthe onassumptions increases Wyatt's 1985 after are reasonable Survey plan funding of Actuarial in the has aggregate. begun Assumptions to deteriorate ERISA and lists Funding, and, six of pension plans. In keeping with EBRI's standard policy, we will not be under Asso funding ciates ERISA, behavior (tacan ble fund to 2) the shows these recently th increases at aggreg announced ate over contribution 30FASB years--for rules for levels a pension declining for laccounting, arge industry, plans acceptable Congress buy illustrates Underannui PBGC tiesimposed actuarial regulations, the to steadily sfunding atisfy methods. basic thincreasing standards e accrued benefits Since upon lpercentage iabfunding by iliinclude tiemployers es is of any to tied plans to date vested ?improve to(78retirement thepercent the actuarial security in benefits 1985) cost of Is Underfundin_ of Private Pensions a Serious Problem? making recommendations or advocating any particular policy position. Rather, and the recent decline in corporate contributions to pension plans in the wake amethod hthat the in ave cvery luding pension are fallen used, long sufficiently cost-of-li benefit time efunding ach period. yevaing promise. rand funded sinactuarial cadjustments eYet, on 1982. athis termination methods From flexibility effecti 1984 are vebasis closely to prior is 1985 for oneinterrelated. alone, to total of termination theaccrued the primary decrebenefits. ase and reasons was any we will strivefor acto cruedprovide vestecl the Committee with_ an analytical framework for of unusually large investment gains. Dallas L.InSalisbury particular, Congress should be aware public 13 On Whether death, goper ingcent. and disability fyou undinprivate gbelieve adequacy oremployers the survipriv refe vorrsate have benefit topension been boththat willing the system was stockowed is to ofunderfunded sponsor or assets in payment defined already or status not benefit in will the at making its own evaluation of this important question. fund that pension and the funds flow, are or expected, a large and annua growing l contribu corporate tions financial the plan sponso asset, r and is pension As For depend Overall, the far date example, to asthe of plans. athe plan very standards because magnitude termination. large By an adopted synchronizing extent of employer thebyonunfunded Congress who the the manner maintains liabilites have timing inachieved which a qualified measured andyou that amount choose goal. ondefined a of to termination view pension benefit the ._ i_for torsi accrued beneflt__ Frank B. McArdle changes in pension legislation can have a large effect on employers' pension basis, contributions, liabilities required EBRI's plan to make associated istabulations funding required to meet with strategy to thefrom fund pension present Greenwich the becomes and plans. costfuture Associates of a projected Overall, valuable liabilities.datathe benefits toolindicate private Arin e on the financial that apension assets level in Is Underfundin_ of Private Pensions a Serious Problem? 50 ...... • ............................. willingness sufficient toto buy fundannpensions. uities to satisfy all future liabilities? Generally, the planning. basis, 1985, system Despite Despite 1,500 has itthe theis Corporate accumulated guaranty generally of necessary the and largest program, well favorable tojoint-tr%,st make over co both rcertain porate $i picture, beneficiaries use trillion assumptions single-employer of the pension incurrent assets andwith funding active that rules respect pension for stand participants still such to plans, behind the purposes allow level when the runa f an alls swer within is "no." the Nocurrent r does the funding law requ rules, ire iand t. Fundin coexists g adequacy along with then ERISA's depends of the benefits risk of losing that some actually benefits will inMbe an-Bing theprovided eventSze an by underfunded the plan.plan These terminates. involve viewed minority claims astoofa benefits group, individual hadmade total firms by accrued to active underfund pension participants their plan plans. liability and beneficiaries. Basically, of $456.9 this billion This is Whether you believe the private pension system is underfunded or not will .............. _ ......................................... Table 2 economic on whether conditions the flow and of future annual events. contributionsThese plus assumptions, investment in rparticular, eturns will the be because fiduciary ERISA rule that allowspension considerable funds mustflexibility be managed in for choosing the exclusive the period benefit for of constitutes the largest single funding source of pensions in the world, and against total assets of $430.5 billion, or total unfunded accrued liability of depend to a very large extent on the manner in which you choose to view the Submitted to the suff Beneficiaries icient. Thiin s current is a verypayment difficult statusquestmay ion suffer to answe ar. reduction Few reseain rcherstheir participants. adds amortizing $23.4 assumption considerable billionfunding of in The future security 1985. of implic plan interest ations This toliabilities the represents ofbenefit rates, new which pension promise can a substantial is, have accounting under ina turn, private significant improvement rclosely ulesplans. published effect related over the by on to liabilities associated with pension plans. Overall, the private pension Percent Change in Aggregate have estimates the Fin ea xam nciia ned lof the Accounting it. cost Comof pan Standards iesa plan can Bo and a anrd d onnow dodeduction alter make more thelimits ir cleacront with riwhat butions respect many have anto d funding payments levels. after an Funding underfunded waiverstermination available forto two firmsreasons: experiencing PBGC only substantial insures year system 1978, has accumulated when total well accruedoverliability $i trillion of $247.7 in assets billion that measured stand behind against the Contributions from Preceding Year business va total riations assets hardship in of key $172.4 also actuari allow albillion, U.S.plans assHouse umptfor ito onsofunderfund. aRepresentatives total can produce unfunded dramat accrued ic diffe liability rences of in known Mechanics employer up to for a contributions maximum ofyears: Funding indexed thatto pension plans. dollar funds amount may ($1,789. constit 77 utemonthly a large in 1986) and and growing (2) H claims to benefits made by active participants and beneficiaries. This ................................................ cD results. Table 1 shows in the Laadjustment rge Single-Employer made to onPl goains ng a pension liabilities by $75.3 corpor benefits ate billion. promised asset. The byratio plans oforassets plan amendments to accrued liability in effect improved for less from than a five 70% constitutes the largest single funding source of pensions in the world, and C_ 20 .......................................................... ratio How does in 1978 ERISAto allow a 95% Joint underfunding ratio Hearing in 1985. on to Pension occur?PlanAsUnderf you unding know, ERISA established But us yeairs ngtheat a adequacy termination differentof ithat are nterest not funding furate. lly can insured. Fo ber measured example, inusing two ways: a 7%(i) inte against rest rate the adds considerable security to the benefit promise under private plans. instead of an 8_ interest rate can increase liabilities by 21%. rules for minimum and maximum funding standards for defined benefit plans, liabilities Declining employment present ifinthe certain plan were industries to be may terminated also lead and to(2)underfunding, against the In underfunded terminations, Committee active onparticipants Ways and Means may also lose some accrued additional since the liabilities declining rathat tio will of Yearparticipants accumulate Chif anBe to the benefici planaries is maintained increases on the an requiring If we look employers at pension toliabilities satisfy the of only minimum the required plans withplaunderfunding, n contributionwe find each The adequacy of funding can be measured in two ways: (I) against the 1983 -15% benefits. PBGC guarantees payment of basic benefits up to an indexed ongoing that yemployer's ear. in basis. 1984, pension basedcosts, on the particul Johnson arly andif Higgins the plan latest has notExecutive been fully Report fundedon liabilities present if the plan were to be terminated and (2) against the 1984 - 2 maximum. Under the Subcommittees new law, in on Oaddition versight to and liabilities Social Security guaranteed by PBGC, up to that point. Large Corporate Plans, 66 plans in the sample of 453 large plans had total additional 0 liabilities I that Iwill accumulate I if the I plan isI maintained I on an 1985 -13 Termination-Basis the terminating 1979 1980 employer Funding is 1981also, within 1982 prescribed 1983 limits, 198'4 liable 1985 to plan unfunded Minimum-Funding accrued liability Standards on--a F termination or accounting basis purp of oabout ses, $i0 pension billion.costs are ongoing basis. divided Impact participants ofinto Pension two for parts: vUnderfunding ested normal benefitson costs PBGC not and insured supplemental by PBGC. costs. However, Normal suchcosts a claim for Year June 24, 1986 Aa It mayplan year must be that difficult arebesimply holds emphto asufficient sized the enforce amount thaon tassets offinancially it benefit toisprovide import liability ailing ant for firms. the accrued to payment distinguish Moreover, that of year allforbetween accrued due firms to Available data indicate that, on average, termination-basis funding levels of Underf Source:unding, EBRI tabulations itself, doesbased not on exert Greenwich an immediate Associates, adverse Report effect to Participants on the PBGC benefits normal termination-basis that canplan (through afford operation, tothe fun pay, dpurchase ingcalculated once sufficiency legislated of annuities) using limits anthat d is asaid are year's more reto ached, actuarial begeneral sufficiently noninsured assumptions. conceptfunded vested of pension plans have risen over the last several years. Our analysis of various benefits that are still unfunded are lost. "on a termination basis." Hence, the termination-basis sufficient funding -- Supplemental although itcosts alwaysareposes thosea associated potential risk with tosupplemental PBGC because liabilities, the plan sponsor which on appropriate LarKe Corporate funding Pensions, in an ongoing 1979-1986. pension plan. Termination-basis sufficiency surveys all points to the rising percentage of plans (78 percent in 1985) that Source: The Wyatt Company, 1985 Survey of ActuarialAssumptions and Funding. Sample of 948 plans. include level has hadof the liabilities a plan optionis to simply ass terminate ociated the present thewith planvalue ch atanges will. of allinObvio accrued acutu sly, aribenefits. al the assumptions, termination A plan is are mainly sufficiently pertinentfunded to actual on a termination plan termination basis under for totcurrent al accrued law. benefits. Table ] aEstimates that of In an addition, holds underfunded of assets participants aggregate plan in excess does pension in pose ofunderfunded that financi findinglevel al inplans burdens is1,500 said that on oftothe terminate the bePBGC "overfunded" largest andlose eventu corporate accrued ally on a liabilities arising because experience varies from actuarial expectations, PENSION PLaN LIRBILITY ADJUSTMENT F_CTOR termination benefits thatbasis. are not If such vested an prior overfunded to termination. plan is terminated, (In contrast, the excess in a plans, liabilities requires Ongoing based Funding additional resulting on a sample premium from of approximately pretroactive ayments by 1,000 nonterminating benefitplans. increases, employers and liabilities to finance As far as the magnitude of the unfunded liabilites measured on a termination the underfunded terminations. COBRA, in addition to the premium increase, sufficient termination all accrued benefits vest upon termination and must be associated assets can with be recovered the funding by the of service employer.credit The prior recenttocontroversy plan establishment surrounding (if basis, 1,500 of the largest corporate single-employer pension plans, when modifies the termination rules, making it more difficult for an employer to the Funding such paid.)number credit in In of anis 1984, plans ongoing given). 85 terminating percent plan is ofbased todefined recapture on thebenefit explicit excesspension assets assumption plans suggests that used that the "lO-year many firm viewed as a group, had total accrued pension plan liability of $456.9 billion Chart 2 Liability Rdjusiment Factor terminate an underfunded plan and reduces PBGC's exposure somewhat. But even will pension cliff continue vesting" plans are theschedules. overfunded. pension plan If far an underfunded into the future termination and is therefore occurs before geared the to against total assets of $430.5 billion, or total unfunded accrued liability of Reported Under Rlternative Interest Rates under the new law, PBGC has limited claims in an underfunded situation. A future concern: What will happen if the stock market reverses itself, Although anticipating worker's tenth manyexpected year different of future service, actuarial liabilities. no benefits methods will of funding be paid normal to the worker costs are and Defined Benefit Pensions Plans with 1,000 or More Participants: $23.4 billion in 1985. This represents a substantial improvement over the Interest investment returns decline overall, and lower interest rate assumptions seem Recently, Termination earned benefits thebasis current will measurement executive be lost.isdirector appropriate If the House of the to,ofPBGC and Representatives reflective has suggestedof,accepts additional the legal the permitted, each implying a somewhat different contribution schedule, employers year 1978, when total accrued liability of $247.7 billion measured against Rate_ Percent0%Distribution 2% 4% by Ratio6% of Assets 8% to10_ Total Accrued 12% 14% Benefit Liabilities more steps Senaterealistic that provision may be forinneeded: valuing H.R. 3838 (i) returns afor$13.50 five-year longpremium term? vesting per For participant; under some plans privatethat (2)plachanges ns, have fewer used in These obligations are generally liabilities, ofrequired an like employer to those contribute sponsoring of a atterminated least a pension. the plan, normalAs are cost you determined each wellyeaknow, r.by plan the total assets of $172.4 billion, for a total unfunded accrued liability of workers will lose all their benefits in an underfunded termination. But the bankruptcy laws to give PBGC a higher priority as creditor in bankruptcy decision high actuato rialsponsor assumptions, a pension this plan could in theresult United inStates a deterioration is a totallyofvoluntary funding provisions $75.3 billion. and actuarial The ratio factors. of assets But to whereas accrued termination liability improved liabilities from depend a 70% _oo - \\ \\\,\ Ratio The ratio adequacy proceedings; same employer principle in 19on 78 and must an to will a(3) ongoing also 95%tighter still ratio contribute basis apply, in minimum 1985. andto i.e., fusupplemental much nding workers higher standards. whose costs. contributions service The amount hasrequired notof vested these of one on the part of the employer. Legally, employers have no obligations to on only two actuarial factors, measuring ongoing future liabilities is far 0% 1.00 0,58 0.35 0.23 @.15 0.11 0.08 @.@6 \\ \\\\ [] 0.00-0.49 contributions will not receiveisanydetermined benefits after by amortizing an underfundedsupplemental \\ termination. \\\\ liabilities over employers continue the at pension a time plans. when the Inoverall practice, levelterminations of economic ofactivity, pension plans as measured happen more complex and depends on many factors, such as: I% 1,32 0.77 0.47 0.30 0.20 0.14 0.11 .. 0.08 [] 0.50-0.74 gO \\ \\\\ In addition to the financial impact on the PBGC, one must also consider the specified periods. Gains or losses arising from differences between actuarial by infrequently. the stock market Whether performance, a pension may plannotis be treated at itsasbest. terminating Recent or actions continuing (H.R. Unfortunately, no plan sponsor data for the universe of private defined \\ \\\\ [] 0.75-0.99 2% 1.73 1,00 0,61 0.39 0.26 0.19 0.14 0.11 Conclusion makes 3838 expectations adverseanda effects difference FASB)andmay underfunded actu work in al the together experience plans amounttoha(calculated of push ve the oninvestment pension the no way more return liabilities, the frequently insurance assumptions because program thanuponce and the is o expected future rate of return on plan assets; pension plans is currently available on ongoing pension liabilities, although \\ \" \ \ [] 1.00-1.24 3% 2.23 1.29 0.79 0,50 0.34 0.24 0.18 0.14 80 \\ ' \\\\ every to viewedoincrease three life by the expectancy years) funding private may volatility. ofsector. beneficiaries; be amortized To As the aextent over result, 15thatyears; most underfplan uother nded sponsors supplemental terminations have benefit formula usually includes wage and service factors. in the next several years, some data will begin to emerge \\\\ as a result [] 1.25-1of .49 the 40 2.83 1.64 1 00 0.64 @.43 0.31 0.23 0.17 continue and force escalating PBGC premium increases, another negative reason liabilities criticized Congress o workimposed these force may be changes. funding characteristics, amortized standards over present 30 uponyears, employers and or future--including 40toyears improveif incurred the number security ofbefore of \\ \\\\ [] 1.50 or more new rules published by the Financial Accounting Standards Board (FASB), which 50 3.56 2.06 1 26 0.81 0,54 0.39 0.29 0.22 70 \\ " \\\\ exists for not establishing or maintaining a defined benefit plan. To the Accrued ERISA's the pension passage employees, liability benefit in 1974. age is promise. adistribution, legal interpretation and rate ofofturnover; corporate responsibility in will require sponsors to provide information on ongoing pension liabilities. 6% 4.41 2.55 1 56 ].00 0.S8 0,48 8.35 @.27 which Economic extent Dallas o the retirement th L.aCauses tfirm Sapremium lisbury assumes ofages; Underfundin_ increases is nopresident legal continue obligation of the to Employee rise to continue -- and Benefit they the will Rpension esearch have plan. Institute, to in One the In most cases, ongoing liability will likely exceed termination-basis 70 5.40 3.13 1 91 1.22 @.83 0.59 0.43 @.33 Frank B. McArdle is director of education and communcations and Man-Bing Sze If future, Overall, the o wage employer 60 despite theand standards salary does the not growth; newadopted satisfy lawand-by the it Congress necessary aggravates have contribution ":':'1" •achieved the1"1':':':':':" inequity because that of goal. he asking would In justification for this is that the accrual of additional benefit is contingent liability. Consequently, ongoing liability is more likely to be less than 8% 6.53 3.78 2 30 1.48 1.00 0.71 0.52 0.40 :::::::: ........ We realize that the Committee has before it recent examples of large firms incur responsible general, is rese o substantial athe rchprivate prospects employers associate. pl business ansoftobusiness are The payhardship, far vfor iewsbetter continuation. PBGC's expressed andfunded $1.5 if enforcement in billion than this they st deficit. atemen of werethe t before aminimum Such re solel inequities ERISA, yfunding those and upon the worker rendering future services. ERISA considers termination of fully funded. This fact does not necessarily suggest that the pension system 9% 7.80 4.52 2 75 1.77 1.20 0.85 @.63 0.48 ".'.%', ,.°.°...%..'.° that have terminated their pension plans with insufficient funds to pay might current of the eventu authors, measures ally and dispose of do funding noteven necessarily onstrong a termination plan represent sponsors basis the tohave views terminate been of the improving their trustees plaover ns, and requirements pension plans would a business be adverse decision. to the Because interests of theofoption plan of participants plan termination, in the ca 50 ;.:.:.; :.;.;.:.:.:-;.; is 10 in0 danger 9.22 or 5.34that 3.25 pension2.09 funding 1.41 is 1.@@weak.0.74 Additional @.57 employer accr rather ued than liabilities. continuing Without to subsidize dwelling weaker on any firms. single Andfirm, if th weat would happens, like the to Both the the accrued past termination several cost liability years. method emphasizes Combined and ongoing with increments the futureinsurance in liability accrued provisions are benefit affected of inERISA, the by aggregate, sponsors ofthe the employer Employee may Benefit seek Research a funding Institute, waiver from or itsthestaff. Internal Revenue contributions and additional investment returns will have accrued before all llZ 10,78 6.Z4 3,81 2.44 t.65 1.17 0.85 @,66 financial burden on the employers remaining in the PBGC will worsen in a benefit current advance pensions year. some formulas; are far explanations moreongoing secure about future in thewhy vast liability certain majority is companies ofalso cases.affected may underfund by vesting their Service for all or part of the minimum funding requirements. Waivers cannot of the ongoing obligations fall due. 120 t2.48 7.22 4.40 2.83 1.91 1.35 1.00 @.77 "_ qO pension standards, vicious plans. cycle. retirement age provisions, and other plan provisions. be granted more than 5 out of any consecutive 15 years. If the waiver is 13% 14.31 8.28 5.05 3.24 2.19 1.55 1,15 0.88 Despite the generally favorable picture, the current rules still allow a granted, The present amounts valuewaived of accrued may bebenefits amortized(orover the 15 costyears. of annuities Without toanpay approved them) Economic Causes of Underfunding 140 16.27 9.42 5.74 3.69 2.49 1.76 1.30 1.00 30 .... All of these effects can be viewed as negative influences underfunded plans Once depends minority actuarial onoftheindividual benefit estimates formula(s) firms of ongoing to underf of liability the und plantheir and have plans. two beenactuarial made, Basically, a factors: contribution this the is waiver, Ironically,employers a valued not meeting part oftheERISA, minimumthecontribution creation ofstandard the guaranty are subject programto 15Z 18.35 1@.62 6.48 4.16 2.81 1.99 t.47 1.13 O _V ,4V ,air ,4V because ERISA allows considerable flexibility in choosing the period for aexpected administered exert tax on on the future the unpaid priv by rate athe te amount. Pension of sector return pension Benefit and the system Guarlife antyasexpectancy Corporation, well as onofPBGC. beneficiaries. creates an incentive schedule must be chosen by which ongoing liabilities can be funded. A o Ironically, a valued part of ERISA, the creation of the guaranty program 20 :::::::: for amortizing some employers funding to of underf plan und liabilities their pension which plans, is, in knowing turn, closely that anyrelated unfundedto contribution schedule allows a plan sponsor to spread pension costs more administered by the Pension Benefit Guaranty Corporation, creates an Source: Man-Bing Sze, Pension Funding Policy and Corporate The funding liabilities Pension levels. can Benefit beFunding shifted Guaranty waivers to Corporation PBGCavailable upon plan (PBGC) to termin firms has ation. experiencing no formal As stated role substantial in in the the When Impact a onpension Federal plan Treasury is terminated, the sponsor knows exactly the amount of evenly over the work-life of the participant for whom benefits are accruing. incentive for some employers to underfund their pension plans, knowing Finance (Santa Monica, The Rand Corporation, P-TI44-R6I, waiver business process. hardship Prior also allow to passage plans toof underf recent und. PBGC reforms, PBGC Executive 1986 liability Economicbecause Report itof has the to President: negotiate"Withwith the insurance establishmentcompanies of the to PBGC,buya that any unfunded liabilities can be shifted to PBGC upon plan termination. 1985), p. 49. Director Since the Kathleen agency that Utgoff guarantees attributed pension20% benefits of the is PBGC's financed deficit by employer-paid to waivers Unfortunately, annuities. company can But makeno fewgenerous plan plans sponsor are retirement terminated data benefit foreachtheyear. promises universe Whentothese ofemployees, private nonterminating and defined pay Termination7of underfunded pension plans contributes toIN_ the PBGC's financial granted plans pension premiums, employeesuse in plans the lower just termination-basis termination is22 wages currently large thantermination ofit available anotherwise accounting, underfucases. nded on would, ongoing one pension Corrective because pension has plan tomeasures both has liabilities, makeparties no interest aare dverse now know although effect being rate that o Studies confirm that companies in financial difficulty are the most likely Ig_ I981 1982 N83 1984 1985 on the federal treasury. In the short run, underfunding can actually increase taken. deficit, The further Consolidated aggravatesOmnibus inequities Budget within Reconciliation the single-employer Act of 1985 insur (COBRA) ance in (discount if the the next company rate) several assumptions. fails,years, the some PBGC Market data willinterest will honorbeginthe rates topension emerge change obligations as froma result year toof (up year. the to ones to underfund a pension plan and shift risk to the PBGC. federal revenues because - all things Year being equal -- an underfunded plan ERISA-limited program betweenamounts)." financially weak sponsors and the financially strong sponsors permits Therefore, new rulesthepublished anIRSinterest to require by the rateFinancial "secu usedrity" in one Accounting asyear a condition mayStandards not of be gappropriate Board ranting(FASB), waivfor erswhich the or means less tax deferral. extensions next will year. requireinConsequently, sponsors excess ofto$2provide overfunding million.information (oFurthermore in verone ) year on ongoing the couldIRSbecome pension must now underfunding liabilities. notify PBGC in Source: The Wyatt Company, 1985 Survey of ActuarialAssumptions and Funding. Sample of 948 plans.