2 Introduction 37 48 12 II 13 6 10 EBRI I i Mr. My statement Chairman, tit oday is focuses a pleasure on TABLE to these appear 1 interrelated before you today issues.to discuss First, the I projecting year to year experience. The PBGC liability at the end of FY also ThisPrior Mr. These Third, "...aid means The Chairman, into purposes that meeting in aggregate ,I_ISA, terms at I would the th of intertwine esponsors un pres economic encouraging funded like ent to premium were to pas ask security t adefined legally g that ser reater rate viceneeds the , required benefit de relevant inc ogbligati of ree ome millions othan ns to plans w sections ocontribute uld le : gof fislative orfallAmericans the oflarge only two sh current policy ortEBRI the at of can actually provide incentives for plan termination and disincentives for The PBGC Deficit, the Premium, and Reform corporations are now less than 10P of total employee benefit Fund Pensi 1982, on for Benefit example, Guaranty was $585 Corpomillion, ration (PBGC). or 52 percent higher than projected in emphasize all incomemylevels. concern that one of the most important purposes of the PBGC pr debates "normal ogram--and assetscost" . of the Un plus in funded last that interest nine obligati sense years onsonthe ha accrued of vePBGC--appear large implied. liabilities. corporati The ons todebate neither are Asoa estim verresult, enc atethe od uragea at current major the publications funding. expenses byFor CORPORATE approximately thatexample, I DEFINED citedan $110BENEFIT increase inmillion my PENSION testimony in in the FY 1985. PLAN premium be made QUALIFICATIONS, rate a part at this of the time hearing would A clear consensus exists that the PBGC program is in need of fundamental _-_llion TI_,MINATIONS, while employee AND benefit NET PLANS Fund CREATED assets 1956-19 are p83 rojected to be re The cord. IPBGC amDeficit Presidentand oPremiums f the Employee Benefit Research Institute (EBRI), a established maintenance the FY 1983 b nbudget. o yr the the 19 creati 74 o ]_pl n oyee of Retirement defined benefit Income Securit plans. y Fr Act om the (ERISA) earliest is portion request $325of for billicontributions oa n.premium The increase, vested made and onfor unfunded behalf example, of obligations has actifailed ve workers are to consider estimated were frequently possible at initiall But y PBGC reduce estimates the deficit, total reserbut ves could at the actuall end of y FYcause 1983 atthe $1.1financial billion, design changes. The program violates the basic principles of insurance to only $13 billion--l_an 59 of total assets." 4/ not being The sponsors given theof full definedattentio benefit n itpension deserves plans : c who oCumulative ntinuati support on the of pensi program on nda being onpr ys ofit, ofused the nonpartisan toPBGC--including pay retiree public pbenefits. olicy the peri research od For during the organizmost which ation part, I fo ran unded this the inis p 19 olicy 78. the effects Although on thePBGC universe has sufficient o£ pensionfinancial plans. Plan reserves continuation to cover is theitsbasis known o£ i.e., enough to cover the current annual revenue shortfall for several years. situation to worsen over time, in the absence of program redesign that such a degree that PBGC cannot hope to be "a sound insurance corporation"--as Plans Plans Net Plans Number Percent A recently released survey of SSO of the nationts largest corporations, plans. financially have argued that a premium increase--or a change in the premium EBRI pay-as-you-go staff--this sponsors has research funding not beenapproach and aneducati explicit used onal today guide programs for used social to as provsecurity, ide a touchst a so one und civil basis in service polic foyr Year funding the Qualified PBGC and of Terminated providing retirement Createdincome to Created the vast majority Growthof encourages obligations While the usefor maintenance ofthe resernext ves and fseveral or this establishment purpose years, mi it gof htdoes not defined be not thehave benefit ideal enough pension poof licya it claims it would be if a $7.00 premium were granted--without reform. conducted by Johnson _ Higgins, one of the nation's leading employee benefit calculation Second, I method--should seek to provide come you with about a only framew as orkpart for of evaluating reforms that the bring PBGC legislati deliberati present retirement, veons.and and future and military regulat Upretirees. to ory retirement. and policy includingdecisions the debates in the offield1982 of andemplo 1983, yee financial course, PBGC reserve is clearly today to notpay on all the the future brink benefits of insolvency; it is responsible and, using for the plans. First, the PBGC maximum liability is not predetermined and is based consulting Firms, found that, in the aggregate, 92.5 percent of total 1956 3,175 192 2,983 19,209 18.4% upon an unrelated condition--the plan sponsor's net worth; benefits. request insurance for principles EBRI a $7d .0 o0 es per nto ot participant the take program. pro or cpremium on positions for the on single legislative employer propopr sals. ogram. preserI_ISA vation established and expansionstricter of the funding premium base--i.e., requirements. the uni The verseminimum of defined ERISA reserves may, in fact, be in the interest of program survival. 195 as 7aAs The result Inine haveof 3,52 years reported, terminations 7 precedinit gof18does passa plans 0 gnot ewith ofappear 3insufficient /,_ISA 347 that saw an assets. the yone 22, creation 55in 6 the federal 1of7.4over accumulated 1958 benefits 3,883 were Fully224Funded and 3,6 95.5 49 percent o26,21 f vested 5 benefits 16.2 second, the insured can increase the insurance coverage (benefits) Statement of Prior Third, Congressto I joining seek must tconsider o EBRI, provide I whether had a framew the o PBGC rkhonor fmight or of assessing serving get intoat whether trouble PBGC as the ifAssistant there premium is benefit plans--has not been given much consideration. contribution 1959 177,000 Of the defined more 3,824 forbenefit than a single 46,000 plans--a employer single 270 321 employer defined percent 3,554 defined benefit increase benefit plan (Table is 29,769 plans theI). normal that The 13.6 cost, have nine government A reviewhas ofundertaken the FY 1983, this FYanal 1984 ysis. and Yet, FY 1985 millions budgets of middle-income indicates why without the consent of the insurer (the PBGC); and were 1960 fully funded 5,011 . 5/ Four-fifths 300 of the4,711 surveyed companies 34,480 were 15.8 Fully Dallas L. Salisbury* Executive Director for Policy. During my tenure, I directed the delay in the premium increase. Worst case studies have been done that can issue can appropriately be severed from the far-reaching issue of basic plus 1961Terminati forty-year ons4,919ofunding f major of pensi 374 pre-ERISA on plans past in4,5 recent 4service 5 years,costs, and 39,02 plus the 5 thirty-year significant 13.2 years terminated definedfollowin benefit since g passa the planenactment ge of sponsors I_ISAofsaw are ERISA, the concerned creation just about under of just (1)1,000 the over had structure 95,000 insufficient defined of the workers third,could theneedlessl premiumy be paidput in is jeopard unrelatedy due to the to this amountfailure of coverage to act in a President Funded 1962obtained. with respect 5,188 to vested 476 benefits; two4,712 -thirds of the surveyed 43,737 comp 12.1 anies Employee Benefit Research Institute ref assist orm oin f the that guarantee analysis. program. congressionally funding of post-l_ISA mandatedpast studyser ofvice the Multiemployer costs, plus fifteen-year Plan Termination funding Program of benefit 1963 post-fRISAplans--a sl5 owd ,840 own41 in percent the 441 increase. establishment Calendar 5,399 of new year defined 197649,136 actually benefit pr saw o12.3 grams, a net assets current (2 propercent). gram and (2) By the prospects end of for FY future 1983 premium the PBGC rates. estimated its deficit careful and comprehensive way. 1964 were Fully Funded 6,581 with respect 509 to total accumulated 6,072 benefits. 55,208 12.4 At the 1979 EBRI policy forum it was pointed out that: Before the that led to enactment of the Hultiemployer Pension Plan Amendments of 1980. Conclusion investment experience gains and losses, plus thirty-year funding of gains and pr 1965 decrease The ovidePurposes A study ein vidence the 7 published of ,495 number PBGC that inofPBGC the defined 512 spring and benefit the of 198 Cpension o6,983 2 ngress in plans. the shouldNew62,191 bec England ome explicitl Economic 12.6 y from The these PBGC, terminations for reasonsat Iover shall$400 return million. to, isThe notstudies an insurance already promentioned gram in 1966 10,124 603 9,521 71,712 15.3 This means that most pension . plans present no risk to the PBGC at this "In the absence of an attempt to return to basic insurance U.S. House of Representatives Review The presented first PBGC theannual "worst report case" was fordated PBGC June in30, identifying 1975, lessthe than eighty-six one full losses Uponresulting establishing from EBRI changes in 19 in78, actuarial our veryassumptions. first project was to conduct a 196 cany oncerned 7These conventional with data 11,292indicate this sense founding that of 602 that the purposcope se. term. 10,690 and Yet, Thisnature the is March reflected of federal 82,402 1982 in PB re its Gg Culation 14.9 annual study argue that the deficit merits an immediate premium increase "to guarantee ERISA served to strengthen many oE those pension plans that existed in principles (i.e., risk borne by related plan sponsors and their Committee on Ways and b_eans 1968 time. Instead12,896 , they have accumulated 672 over12,224 $400 billion in 94,626 assets to 18.8 assure employers), the only solution can be excessive premiums (i.e., risk year firms after out ofestablishment 6,000 firms of that Subcommittee thehad program. unfunded on2Oversight / The liabilities transmittal exceeding letter30stated: percent policy clearly ERISA forum affect also titled employer established Pension decisions that Plan past regarding Termination servicesponsorship costs Insurance: couldand notdesi Does begnthe funded of Foreign defined on a 1969 14,692 868 13,824 108,450 14.6 that entitled 1974, budgets. ourand Premium (PBGC) The it bud assures Requirements obligations get showsthat that will emplo forPBGC be the yers met." has Sin$1e establishing let And, Employer eachPBGC current new Basic argues plans year Benefit that will serthe vecarefull Insurance premium as itsy borne by unrelated plan sponsors) or application of general revenues 1970 that promised16,benefits 512 will 1,142 be paid. 15,370 123,820 14.2 (i.e., risk borne by the general taxpayer)." "Enactment of the plan termination insurance program as part of tax benefit Program of net deductible pension did worth. not ebasis plans. vWere en Hearing menti on allon less on eighty-six this thethan purp Financial ose, a ten-year to no have tStatus even basis. terminated, Secti of o the nIn VI this they which sense, would assessed ERISA have increase 1971 "is 22,493 essential to1,60 our 5 (PBGC)20,888 existence as 144,708 a sound insurance 16.9 Experience Have Relevance for the United States? i/ Experts from Germany, consider guide to design the future. and funding. In terms of number of terminations the FY 1984 budget FRISA ushered in a new era in security for pension plan participants Pension Benefit Guaranty Corporation's 1972What we28,265 know about the 1,74 financing 5 of PB 26, G5 C20 and the strength 171,228 of the 18.3 pension A framework for reform was suggested by the participants at the EBRI Finland, in the Sweden, private Japan, sector. and theApproximately United States29 came million together Americans tocodiscuss vered a discouraged represented full potential funding claims of plans. totalingNonetheless, $4.3 billion the defined over benefit the remaining pension Has 1973 the PBGC "Impact Achie 33,830 oved f the Its Premium Single Purposes? 2,222 Increase." Employer Insurance The31,608 GeneralProgram Accounting 202,836 Office issued 18.5 a corporation projection PBGC has ofandalread 145, to guaranteeing was y assured based that upon payment tens an actual of of thousands future 1982pension experience of pension benefits of participants 155. to some The 40 FY by defined benefit plans are now assured that once their basic 1974 system appears32,579 to justify certain 2,577 conclusions30,002 : 232,838 14.8 forum. Reforms suggested at the forum would, first, be based upon movement number benefits of thebecome issuesvested, being reviewed those benefits by yourare Committee guaranteed." today--premium levels million rep plan ort uniAmericans." verse to the is well Congress funded. on3/November 14, 1984 (GAO/HRD-84-5) entitled lifetimes First, of asthe far planas participants making benefit March and 2 payments: 0, beneficiaries. 1984 PBGC hasM1 provided single for employer the and 1985beneficiaries budget assumedwill trusteeship receive greater of 102 benefits insufficientthan plans would inhave 1984--the occurred number had First, PBGC will at some time need more revenue than the current toward principles o£ insurance. Second, PBGC would only take on obligations The and calculation Funded Statusmethods of Plans:(fixed Is There versus a Problem? variable rate) and basic design The report also noted that the purposes of PBGC contained in ERISA are to: timely defined andbenefit uninterrupted pension payment plans of have pension currentbenefits assets under of terminated more than plans. $400 1975The premium continuation 15 of,319 $2.60 per of enough ye4 a, r550 per defined participant benefit 10,769 , pension if insufficiently plans 243,607tofunded pay4.6PBGC Legislative it did acquire Chanses in 19Needed 83. The to FY Financially 1985 budgetStrensthen assumes the Single102Employer plan rate Pension for ERISA not been passed. 1976 4,790 8,970 -4,180 239,427 1.7 plan terminations continue; at the point that a plan sponsor terminating a plan experienced business questions billion--a 1985Greenwich o asencourage well. such veryResearch as significant alternative the continuation Associates asset definitions (GIIA) coverage and maintenance began ofratio the doing "insurable" for an of the voluntary annual system event. survey private which of large means Durin 1977g FY 1983 6,953 32,600 beneficiaries 5,337 received1,616benefit checks 241,043from the0.7two premiums Plan The Insurance PGBC's is--in Program record fact--the .of success The only GAO sho repway ortuld be alsto ocarefull guarantee totally y built ign PBGC ored upon. solvency thisAdjustments founding on a 1978second, the 9,728PBGC's current 4,625 liability, 5,103 and the tot246,146 al liability 2.1 insolvency. Third, a form of reorganization or temporary relief would be Thatpension policyplans forumfor reinforced the benefit my of conviction their participants; that pension policy must be that at its worst the potential exposure of PBGC is less than 1 percent of corporate purp trust 1979 ose funds of pension the 15,755 of PBGC. the PBGC. plans Finally,The 3,26 in 71972 in FY Senate 1985 covering 12,488 proposed testimthe ony bud vast gsupp et 258,634 orting majority estimated a of pro61,800 5.1 posed plan self-financing exposure How did the ofbasis. bud the get PB projections GC, are small prove compared out? Even to the thougto htalforty-three assets of fewer to the PBGC program--including premium changes--should be evaluated against 1980single empl 18,849 oyer defined 4,297 benefit pension14,552 plans; and 273,186 5.6 offered to plan sponsors who are in financial difficulty but are not considered in a more comprehensive manner than this nation has generally beneficiaries total o pension maintain asset forinsurance FY reserves. 1984premiums and 58,700 at theinlowest FY 1985. level consistent PBGC's most with recent premium participants. 1981 increase, 23,789 Those the PBGC surveys 4,536 failedhave to etraced ven19,253 menti the on trend this of purp 292,439 increasingly ose or assessbetter 7.0the insufficient PBGC projects plans continuing terminated deficit in growth 1983 than if the expected--a premium increase 30 percent is not the purposes stated in ERISA. Other ERISA proposals, such as reversion of 1982third, 28,189 since liabilities 5,043 (the deficit)23,146 occur, in part 315,585 , due to the7.9 insolvent. Fourth, premiums would somehow be tied to the exposure created carrying out its obligations; and attempted. Further, it highlighted the fact that every aspect of a benefit pfunding statements 1983 The otential struc PBGC a/ ture of and cothe estimate 18,393 nsequences Pension major of the 75,000 pension Funding program on beneficiaries 5,481 defined ,plans the in premium benefit this for 12,912 country. issue FY plans--the 1984 should and premium 90,000 n328,497 ot be for expl base-- ored FY of 1985. 4.1the granted. This is based on an income estimate of $127,596,000 at the present assets, error--PBGC's must also liabilities be considered were only in $15 terms million of their lower PBGC than implications. the earlier budAn gety in isolation. for the PBGC. o Thepro early vide history for the of pension timely and plansuninterrupted was marked payment by plan of failures pension because guarantee Total: The overview program essay is to interrelated the GRA's : recently the premium released eleventh structure, survey the prowhich gram proposed Second,169 concernin percent g premium premiumincrease. levels: PBGC can be judged in more than one rate estimate ($2.60) based compared upon to the $286,006,000 higher termination at the proposed rate--a rate ($7.00). 2 percent dollar changes or "reforms" that might discourage the maintenance and growth of 1975-83 141,765 95,629 328,497 328,497 - Since 1979, the Administration, members of Congress, and others have benefits under plans covered by PBGC. co structure, many vered plans 1,670 andoperated large the nature corporations on ofa the pay-as-you-go guarantee. noted: And, basis. that Theother low issues contributions such as way relative to this purpose. Advocates of a pay-as-you-go system suggest reduction. PBGC If Coprojects ngress In other hopes FY 1985 words, to expenses maintain the total of the$237,650,000 deficit PBGC as was as a only self-financing compared 3.6 percent to a less agency, FY 1984 than defined benefit pension plans may be inconsistent with the nation's long term * The views expressed herein are those of the witness and do not represent SOURCE: IRS Disclosure Data; EBRI tabulations. suggested similar changes in the single employer program. the views of Trustees, Sponsors or Staff of the Employee Benefit Research the reversion of assets are inextricably intertwined as well. necessary in a plan's early years had caused some employers to overpromise. C that ongress PBGC premium must carefully requests consider have been the too implications high. Yet,of advocates every legislati of a vfully e estimate projected of in spite $192,327,000. of this significant This increase 30 percent is due drop to inprojected terminations.growth in economic 4/ Large securit Corporate y goals; Pensions and the 1983 y may (Greenwich, harm the PBGC. Connecticut:This long Greenwich term Institute. EBRI is a nonprofit, nonpartisan public policy research 3/ For a thorough treatment of this issue see Retirement Income Res a/ earch Nine-month Associates, period, 1983), January p. I, i. 1983 The to 1984September survey will 30, 1983. be released in late The important point is this: the design o£ the program has, itself, organization located in Washington, DC. March lJ&en 1984. pension contributions became very high in later years, the plan could pension policy decision for the "maintenance and creation of defined benefit Opportunities benefit funded This pro payments g trend ram insu isin gan gest consistent FYAging 1985 thatAmerica: towith PBGC $182PBGC million premiums Pensions budgets from and and since $156 requests themillion FY Economy, 1976. haven'tin by The Sophie been FY 1984. PBGC, higM. h perspective should--and must--become the basis of premium increase and Korczyk, 2/ PensionChapter BenefitII Guaranty (Washington, Corporation, DC: Employee Annual Report BenefittoResearch the President Institute, and 5/ Executive Report on Large Corporate Pension Plans 1983 (New York: created a portion o£ the current liabilities. Further, the present design 1982). not be financially maintained. Without advance funding a pension plan must enou pensi C--ongress, g oh. n plans." June 30, No1975 t only(U.S. do they Government provide Printing the fundsOffice: for the Washington, PBGC, but DC). they g Johnson iven the_ Higgins, non-insurance 1985). design of the program, has been very unsuccessful in program reform considerations. I/ Published in 1979 and still available from EBRI. continue for any benefits to be paid. o5/16/84 03 03//16 16//84 84 03 03 03//16 1 16 16 //84 84 184 03 03 03 037 ///16 16 16 16/1 /7 84 84 84 84 o3 03/1 16 16 /84184 05/16/84 03/16/84 EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street. NWiSuite 860/Washington, DC ZOO37,Tetephone (202) 659-0670