T_ 4 gTATE _TAT M E EN MEN T TT_ OO F hFlo DA D5ALLA T_ LL hlo Ag S3 ; [;ALI gAL a;BURY Igl]UR¥ T_I_ 2 that _h_ vast majority of parS_ipants in ddinM b_n_fit l_ngion plan_ h_e no risk of a_uM benefit loss. Jo list int ed C homm ave ip_n tteesion on pl Ta ax ns atioth n,at a aa rewell over afa unded other,s, but maksin e c ce leathe r thPB at G the Cre does i_ not notagreement have legal future. a Tho dher Pe BG toCvery nowco fa neservative _g a financ aic al coun eriti aing a that measures pogeg a und aeer rioua FAg throat 35 whil to e the_he fuha vast re of benefit PB Co prnc GC om erned isae d sopted th by at d_v_lopma have a r_vi_d not n b_en _ inv_gt iadvance n m1991 _nt policy I_B ,funded. RI uin ndar_ook 199 Pr0 ivate thatitde _ imm fi ow ned M n iat_ly r_via b_ne wfi_ ro _due f plan PBC M s C ark Funding Ratios of Single Employer Defined Benefit Plans, 1977-1987 Comparison Surveyed of PBGC Finn EMPLOYE s Premium ' Funded E and Ratios, BENEFIT Investment byRPercentage ESEARCH Manageme IN of STITUT All nt Su Fee E rvey Basis ed Pension Points Plans Exposure EB Levels Chart RI Faclng 1 PBGC T-86 Reports from the General Accounting Office, PR theES Cong IDEN ressional T Budget Office, and the Joint Committee yet among analysts upon the specific changes that should be made to the PBGC recourse to the excess assets of overfunded plans these assets are not induded on the Status its singlof emajo -ethe mploy rit Defined y er of the insurance Benefit large de System program. fined benePayments fit plan sponsors to current follow retirees GAA are P procedures not at risk, inat equi and appro ty inxie May mate xposure ly 1992 $4 fpublished rom 00 bi5 ll0 ioper n ov c E en BRI et rfun tIo ss d33 ue ed per Brie incen f the No. t, awi ggr 126: thegsubsequen a "P te B .GC PBSolvency: G t C decreases has been Balancing the to 2 f5 ocus percen Soco ial ft (billions) Asset Distribution in Private Trusteed Pension Plans, 1991 list. on Taxation, as well as others, make clear that there is not agreement yet among analysts upon the EMPLOYEE BENEFIT RESEARCH INSTITUTE program. The history noted above indicates that the Congress will enact reforms to least for those events defining their solvency Funding and Ratinet o worth determinations. Ratio the imm ofThe Accrued ediatPBGC e futur 's e ability , and to ther mee e tisits suffici futur ent e obliga time ti to ons makdepends e the neca essary lso upochanges. n the healt But h of in a and tten 1991 Casual tio,nand d ty uri increased n Insuran g thecpas e bond tPe two rspec exposure yea tives." rs because from I ask4o t 3ha f percen a t p tr he esen tfull t to d te 5e 9 x fi tpercent co itf o tha f $ ,t2. rw 5 evi ith bi ew llio further n bean ind cluded a Premiumpaidfor PBGCGuarantee SUMMARY specific changes that should be made to the PBGC program. The history noted above indicates that the assurB e EF that ORE crisis THE will SUnot BCOMM occurIT , TEE and will ON enact PRIadditional VATE RET reforms IREMENT in the PLANS future AND if needed the need Perhaps for changes the most must impor not tbe antignored." distinctions Thebe report tweenhighlighted the two programs the fact is that thathe t funds increases to 70 percent in 1991. This represented a signi Expsfi ocan uret shift from the investment in B p the o etent ne the private fitis al record over shA d ort efi sse ofal f ned ts this l of be hearing. 1981 $30 nefibi t lli system 1982 oThe n-S4P 0 1983 as BGC ba iU whole. io and 1 n9 (expressed 84 inittsod P19 underlying BGC ay 85 'sin rdo e basis 1 po 986 lla rts rpoints) s sta that ov 1t9 ue 8 te r 7 aithe nstth 1 ill 988 e next have aggregate 3 10 9 room 8yea 9 rs. 1990 to 1991 Congress will enact reforms to assure that crisis will not occur, and will enact additional reforms in the 1977 85.0% PBGC and the "S&L Fiasco" OVERSIGHT OF THE INTERNAL REVENUE SERVICE to insure stability of PBGC. ($1986) are "underfunding not generallyof available a small pe to rcentag the participant e of private on pension demand plans in a de threatens fined bene the fitPBGC's pension defined policy urged benefit upon plans thehave agency $1.3intrtil he lion 197 in 0's asse bytsERISA to back author $900 Sena billion tor in Ja be cob nefit Javits liabilities. , who evolve future This s,iit f uati nee bud to ed n bot to has h insu have br een e sta grown c bili ompa ty oprogressively r fe P d BGto C.the savin stronger gs and sin loan ce cris 1974 is. by some, yet during The Employee Retirement Income Security1978 Act of 1974 (ERISA) 84.2 was a landmark piece of legislation. f 0.00-0.49 uture." 17% COMMI 8% Participant TY 6%EE Retires 4% ON FI 3% NANCE 2% Partic 3% ipant Retires 2% 3% 2% 1% .0r- plan prior Public to tconfid ermina ence tion is ofsom employmen ethin1 g979to t. beAt gutha ard ted. poin 91.0 t It approxima should only telybe 4 thr 0 percen eatenet d oiff Available Among its major evidence provisions sugges was ts thth e at creation approximately of PBGC. ERISA 85 pe in rcen general t of , and pens tion he proplans visions have related asse tots fisca argued l 1991 Employer thatalan one - equity , sponsored combi orien nedted unfun pension emphasis deIdEquity plans liabi w 50.0%] lould represent ities o allow f civi an llower ian important anpremiums d milit source ary pens over ofio retirement the n p long lans 1978 116.7 0.50-0.74 17 13 13 8 6 5 3 4 4 2 4 o, _ _ _ oo _ _ in 1992 atcage 0 65 in 2032 at age 65b 1980 U.S. SENATE 107.0 PBGC Premiums in Perspective It PBG mus C tin be particular realized, tha have t ge been neral amend taxpaye ed r many interesti ts mes lie a sinc s we e ll 1974 in po inlian cymake effortrstogiving better a ac tthention ieve thteo o the riginal long- plans there is off aer real a lump-sum reason to do opti so on. . Comparison Although there of PBGC is some to the poten "S&L tial fiasco for lump-sum " serves to imply term. equal to Th Thor e e n 198 exceeding ew7 po report licy 100 1979 h hi as ghlighted per thecent virtue ofan liabilities, ofextraordina limiting up sw rily ings from 126.0 successful in 45 the percent PBG legislative C ind1981, eficit and wh effo en rt 38 by the in inc come reased forby Ameri $52cb ans. illion. InActua 1990, ripriva al dt ef eici pension encies ore f t firemen ederalt reti bene rement fits oannui f $141 tybillion programs 0.75-0.99 21 24 17 15 13 14 10 11 11 11 10 Maximumpremium 2.73 33.85 1981 106.9 term tax consequences of public pension and retiree medical benefit promises that have not been advance purposes of the Act. PBGC has consistently undertaken analysis to identify areas where further change 1980 SEPTEMBER 25, 1992 73.0 Some argue that significant increases in the minimum per participant premium dist agency: thatria bu large tisignificant ons ........... numbe to nerga change ti of ve pension wly ___ in impac thplans et single-employe theth cash at no flow one r othinks f p arogram pension are in and plan trouble movement , this ac re ould ontothe be a va verge riable 1 interest percent .00-1.24of rates plans change, have 23 but assets the26 in negative excess 25 of of 150 lowering 20percent 21the oflong liability 17 term 16 for rate accrued of 16return benefits 18 that 20 25 Minimum a ccc ons oun ist ted o premium f $f86 or431 billio pern cen it n to he f the Civil $457 Servi billion c0.72 e Re in tirtem otal enretir t an ed meDi ntsab ben ilitefit y6.F 93 un paym d a end nts $7(U. 02S. 1982 115.4 would improve the system. funded. During fiscal 19911981 alone, combined unfunded liabilities 42.1 of civilian and military pension plans 1.25-1.49 11 12 18 21 19 21 20 20 19 20 22 that all plans must pay could lead well-funded plans to terminate their plans in con of failure, trolled th (at at leas a taxpayer t theoretically) bailout by is imminent ERISA Sec , t and ion 4 tha 045 t ,Pwhich BGC isallows in historically PBGC to bad rate premium structure. The changes in the Pension Protection Act of 1987 again might Departmen be t achieved of Commerce). by a higherByexposure comparison to , equities. private pension benefits totaled $7.4 billion billion in the Military Retirement Sys 1983 tem that futur 124.7 e taxpayers will have to pay. (table 3).3 The percentage of plans that were fully funded on a termination basis 1982 39.5 I Misce incre llan ased by $52 billion. Actuarial deficiencies of federal retirement annuity programs consist of $864 1.50 or more 11 17 21 32 38 41 48 47 45 45 38 condition. None of these conditions Average exist.Annual The unfortunate Fees Paidto Outside terminatio Managers ns of Eastern and exchange for a defined contribution plan or other possible employee benefits. There is I am pleased to appear before 1984 you this morning 128.8 to discuss the financial condition tightened recapture the partminimum of any distri funding butionsstandards, that start wi within th new theminimum three-yearcontributions period immedia , tely in 1970By . Fa the ctoring end of con fiscal tributi year ons 1990, and the earnings agency _o , along had not with proposed benefit paymen any specific ts, private increased When every cons year ideri be ntween g any r 1981 etiremen and t198 inc 7oand me policy leveled pro offpo be sal tween , its po 198 tential 7 and effect 1991. on 1983 35.8 I was at PBGC during 1977 and 1978. I had the privilege of working with Senators Jacob Javits and billion in the Civil Service Retirement and Disabili_ ty'_Fund and $702 billion in the Military Retirement (expressedin basispoints) 1985 136.3 no data to prove or disprove the hypothesis that the PBGC premium is close to the level Pan Am, which increased PBGC liabilities in 1991, were anything but unexpected. The preceding of quarterly the Pension contributio the failure Benefit nso ,1984 fGuaranty th aelien plan. for Corporation Cer missed tainly cont , there ributions, (PBis GC). only 25and .9 My liminew name ted evidence rest isriDallas ctionsof Salisbury. on fundingI PB sec legislative tG orC de shfi oned ul language. d be bene cofit nsid The pensions ered annual . For had e report xaan mple esnoted: t,ima leg ted islati "PBGC to ax n, expendi lik could e O tBR ure encourage A '(using 87, whibetter ch governmen limi funding ted t the System NumbertF of ha rom tPlans future 1977 taxto paye 198 575 rs 7, withe ll 813 have funding to pa 700 y. status 919of single-employe 846 799 r 720 defined 786 benefit 787 plans 781 801 Harrison Williams on early revisions of the PBGC statute. I had the honor of directing the study effort 1986 132.4 1985 31.8 where it would cause plans to terminate. However, examining the fees pension funds p catastrophic am waivers. rospe pct resident of Also, liabilities "runs P of BGC on the 's from the po Employee bank" sition LTV f were in rom bankruptcy Benefit t well he stknown andpoin Research wasnearly t imp 1990 of rde oved Institute a fidecade nedan bene d ( ago. even EBRI) fit plan In tighter , 1986 asponsors nonprofit the or , a and t me ha bi ttlhodology) it led reduce y to of"w refo ell its rm -fun " exposure ofof d $8.2 e the d PBGC billion plans by Multi-employe seeking tin o re fiscal ceive tougher 1r993 fur p ;the rotgram ofunding r talded tax and ucexpenditures tthe irules ble present ,co better ntri stability buti f pricing or ons publi of , that se c the rv pro and ecost dgrto am. priva of I te has significantly improved, rising from an average of 85 percent funded to 129 percent 1987 128.6 1986 4_,;_ PBGC. ha Wve henpa co rtici nside pated ring in an ongoing y retirem re ent views income of PBGC, pol Statement icyincluding proposal, ali Pk BGC e OBR Ad A vi'87 sory or Committ the Revenue ee Privatization Act of 1978, its nonpa pay PBGC investment rtisan, defidt public was manage reported policy rs provides rat esea $4.0 rch billion organization a reference (compared point based to for in $2.5 the Washington, billion magnitu in de1991) DC. of the dueamount to the requirements for allowing a plan termination were enacted. PBGC handed the plans Source: insuring reduce The the underfunded " Wyatt PBGCompany, C safetplans, y n1991, et."reducing In 1990 addi and tioinsurance n 1989 , the SuReve rvey coverage of nu Actuarial e Actby oAs f limiting 1 sumptions 978, whi guarantees, ch andcr Funding: eated or Detailed funded on a termination basis (table 4). Since 1980, defined benefit plans on average sector employer-provided pensions was $56.5 billion. 1 Average 59.9 AllCorporateFunds 44.0 Task potential Forceeff in ect 1982-83, on PBG and C should presently be consid serveerby ed.appointment For exampleof , th Pr eesident Senate Bush version on of thethP eBGC pending Adviso enry ergy bill sho pension rt term Supla rvey holding nsResults are willing of Pen thsion e to LTV Plans pay pla fo with ns r ou 1,000 by tside PBGC. or More services. Active Participants (Washington, DC: The Wyatt Source: EBRI Moreover, U.S. Dhas epartment be af en terof committed, aLtabo ermina r, Peti nsion on since the andits c W ash elfar founding flo e Be w n posi efits in tion Administration 197is 8,also to the markedly ,Taccurate rends in diff statistical erent terminated by LTV back to the company. The number of plan terminations increased to increasing 401(k) plans coinsurance and allowed bytax sharing deduc losses tible empl ....theoye keystone e contrib touti a sound ons toinsurance profit-sharin program g and is have been overfunded. The increase in funding ratios most likely reflects a combination Committee. Over $1 billion 40.7 (H.R. 77Comp 6) includes any, 1989, a provision 1990, that and c 1991). ould have the United Mine Workers pension fund reallocate $210 IMut Pensions, JohnA. Turnerand DanielJ. Belier,eds. (Washington,DC: U.S. Department A recent survey shows the average annual fee paid by corporate plans to analysis between 10,865, Congress but of theteconomic erminatio two has programs. ns a security long with h Deposi isas tory issues. set tof ors reversio ca Through in reful S&Ls ns moni declined. were ou tr oring research, typically Th ofePBGC theme we paid strive and of immedia tleg he to is re la contribute por tti ely ve t , was ac while tionto legislative changes to strengthen the insurance fund." stock-bonus defined contribution plans but not to defined benefit plans, may well have $501 of PBGC factors, -1,000 Financial mill including ion History higher 1990 andcontribu Current tion Financial rates needed Status 40.6 25.6 to meet a minimum funding Note: Data of La from bor, The 1989) Wyatt . Company are based on a survey of pension plans covering 1,000 or more active million to pay retiree medical benefits and would create significant new liabilities for employers who had Before the Senate Finance investment managers, relative to assets managed, was 44.0 basis points, or 0.44 percent $251-500 the when PBGC formulation needed can millio spread nto avoid of payments effective any type over andofaresponsible situation long period even health ofrtesembling ime. , 52.5 welfare,theand "S&L retirement fiasco." And, policies. "Keeping Promises", and it again highlighted the strength of the overall system. indirectly Theha 1991 rmed annual PBGC. report Finally carried , the Sena the cover te vertheme: sion of"Strengthening the pending ene the rgyPension bill (H.R. standards, favorable investment returns on equity, and the use of higher interest rate employees. Concern regarding The 1990 survey PBGC's contained financial single viability employerarises plans (90 from percent) a current and multiemployer agency deficit plans previously Employer-spoenso mployed red pension mine work plans ers. rep This resent policy an proposal important has soua rce direct of reti impa rement ct onincome the affec fo ted r Ame employ ricans. ers $101-250 million Subcommittee on Private Retirement Plans 43.2 and Oversight Source: ( ERISA a basis has Ippolito, point been isRichard equal extremely A. to The 0.01 successful Economics percen0 in of inPension st 1990 rengthening (G Insurance reenwich the , Pension Associates, overall Research insur 1991). edCouncil, defined According Consistent (10 Alt percent). hough with ou mos r mission, t of the discussion we do not h lobby ere has or d advocate ealt withspecific the similari policy tiessolutions. (or lack The 1988 report stated: "Serious problems do remain, in part due to the Safety 776) inclu Net" des The a provi report sionstated: that co "It uld is ha becoming ve the Uclear nited that Minwe e Wor cannot kers achieve pension the fund goal of Source:EBRI and In assump 1990, comp theirt pio il ri a atio va ns bility te nfrom pension to toBoard discount fundofr their e Govemors tirement o future wn opension fbenefits the be Federal nefi plans of tsReserve .$14 , 1 and billion System could account , Flow therefore of ed Funds fo ultimately rAccount 31 perce s, nt Fi harm nancial of th PBGC. A e ssets $457and This billion doe in s of $2.5 billion in the single employer fund and the estimated $31 billion in $50-100 million 44.9 Wharton School, Universityof Pennsylvania,1989. Liabili_es, not to benefit Fourth EBRI mean Quarter system. tabulations, that 1991 it should (Washington, not pens be ion DC: com Board epla law of ns ,Governors bpaying ut the dof ecth th isio eeFeder n minimum toal affect Reserve PBGC Syste premium should m, 1992).be to und PBGC erstood payand a unce thereof) rtainbetween status of the the exposures contested of LTV S&Ls plaand ns. PBGC Unpredi , the ctable mostcatastrophic important differen claims cand e total retirement benefit payments (U.S. Department of Commerce). Factoring contributions and earnings, financially reallocate $sound 210 milli pension on to pay insurance retiree without medical legislative benefits and changes." would cre The ateyear signibrought ficant new Despite the sound aggregate funding status of the defined benefit system, the net underfunding within individual single-employer plans, $13 billion of which is Under $50 million 43.7 o __ _ _-_ Note:The aln Department its 1991 ofA Labor nnual published Report, asset PBGC alloca repo tiono rfts siexposure ngle-employer indefined the single benefit employer planswithsystem 100 ormore of particip $31 billion. antsbasedon Introduction explicit. along premium wiF thur be rate th nefit ermin opaym re the , ents, range it should private of Ibe sector bas emphasized is defin point ed to benefit 9th ba as t pe is th nsions e points "S&L had fo fir a an sco be estima nefits " had ted at oth tax the erexpe fea annual nditu turre es be economic tween the downturns two guarant could ee f still undsthreaten is that the the lik agency's elihoodfinancial that a plan stability. insuredBu by t with PBGC thewill adverse court decisions and major terminations. The report states: "without further liabilities for employers who had previously employed mine workers. This policy deficit of the single-employer insurance system can be significantly increased by single 1987 5500 considered forms.Assetallocation by PBGC in 1987 to was pose equity, a 22.9 serious percent; risk bonds, be16.7 caus per e ce of nt;cash, sponsor's 11.3 perce financial nt, realestate, trouble. 0.8 percenTable t; This figure isdiscounted to 1986 price levels using the Consumer Price Index for All Urban on _e (using government methodology) of $8.2 billion in fiscal 1993; total tax expenditures for public and unallocatadinsurancecontracts,22.4 percent;pooledfunds,20.4 percent;andother, 5.5 percent(JohnA. Turnerand DanielJ. Belier,eds., not guaranty found Themaximum in Em the plope yee nsion ofR$28,22 etire system. ment 7 perITh nc participant om esee features Securit (table y ar Act e: 5). of Unde 1974rfunded (ERISA) pe was nsion a lanpla dma nsrk Sour fail FY 1988 is ce: diversi Employee pensfi ion ed Benefit refo across rms, Resear several the cpension h institute key industries itabulations; nsurance whereas system and Greenw S&L now icguarantee h is Associates, considerably funds Goingmore were stable changes in the program the deficit could approach $18 billion by the end of the decade." pro Consurmers posal has(CPI-U). a direct impact on the affected employers and their ability to fund their 1 occur prerse ences nts aof time distress trend te of rm financial inations information of large pensfor ion PBGC plans.and PBGC the ipublishes nsured system. an annual Trendsin Pensions, Washington,DC: U.S. Departmentof Labor,1992). p C rilvate early,secto if we r employe are conce r-p rr n oed vided about pe insu nsions ring t was he fiscal $56.5 viab billion. ility of PBGC, we should carefully think Global, Good Going, Investment Management, 1991(Greenwich, CT: Greenwich paying piece of•th As legislation. e maximum of year-end Among pr1988, emium its FSLIC-i major pay from ns provisions ured3 bsavings asis was poininsti ts theto tu crea tions 34ti basis on were of points PBGC. much forERISA more the same in exposed and equitable. exclusively The reforms to the rihave sks ofpa rovided single indus greate try r secu that rity wasfoextremely r the system vulnerable and the to The 1991 report notes that insured single-employer plans have $1.3 trillion in own pension plans, and could therefore ultimately harm PBGC. This does not mean list of the Table topI50 demo unde nstr rfunded ates the pens willingness ion plans.ofUnde Congress rfunding to adj by ustpla premiums ns on thisto list maintain through the potential implications for PBGC of all policy proposals related to pensions and retiree health Associates,1991). concentrated in securities sensitive to downturns in the real estate market than level of guarantee. Pension plans currently pay significantly less for their benefit fraud be general, tha nefits t itand sho it and uprotects. even ld the ntot s provisions beyond bec Th om e epi rla t ogram sw, related control. butistto h be e PBGC tter decis funded ioin n particular, to aff and ectmany PB have GC ofsh been the oulop damended po be rtu un nid tiers es many tood for assets and $900 billion in liabilities. It states that troubled plans, concentrated in steel, in the crea cash sed flow from solven $14.2 cybillion of theinagency. 1989 to P $21.5 remium billion income in 1990. is currently 4 Three firms, at an all Gene time ral high benefit plans. We should guard public trust, and we should continue to take actions that assure that Table I presents a time trend of financial information for PBGC and the insured system. It demonstrates abased onthe annuity purchasepriceof $9.36 per dollarof annualincomestartingat age 65, and The Financial Strength of the guarantee than they pay to outside managers for pension fund investment services times since defined 1974be in nefi ant effort pension to better plans achieve are today the(cha original rts I and purposes 2). Defined of the benefit Act. PBGC abuse have either been eliminated or reduced. As a result, employers, workers, and auto, and exp tire lici and t. airline industries, are underfunded by $40 billion, with $13 billion in the promi willingness ses made of areCongress promisestokept. adjust We prem should iums "tell to main the people tain th"e the cash truth flow ; we solvency shouldof not the"fea agency. r-monge Table r." 2 and thethe 1992 cas mh aximum flow mo is quite nthlyper positive. participa Acco ntbenefit rding of $2352.27. to PBGC, "Although cash flow could turn Motors, Chrysler, and LTV are responsible for 97 percent of the increase in Pension Benefit Guaranty Corporation has (from consistently 40 pens bas ion is po plan undertaken ints assets to 53 ba as analysis re is highly points). todiversified. identify Only under areas funded where pe further nsion change plans pay would compares r The etirees Long can PBGC's History all look current ofto PBGC re a por brighter tedReform exposu future, re levelconfident with available that figu defined res of past benefit exposu pension re (Ippolito, plans 1989). financially Clear troubled ly, if we companies. are concerned The about report insurin notes g a the $31 fis billion cal viabi single lity o employer f PBGC, we plan bAnnuitypricesfor participantsretiringat age 65 in 2032 are discountedat 6.50 percent, the negative as early as three years in the pessimistic forecast, the fund has ample assets to underfunding ($7.1 billion). (PBGC has reached tentative agreements with LTV to limit 1990 exposure ($25.6 billion) is lower than at anytime between 1978 ($116.9 billion) and 1986 ($49.2 premiums improve immediate •S&Ls the annuity close system. were to interest average givenrate new investment for January, investment 1992. management poAnnu wers ity in pri fees 1980 ce isfor expressed and pamany rticipan inmarginally 1992 ts retiring dollars. at age will continue A revieto w pay of PBGC benefits Annua as promi l Repor sed ts to -- and Congress that the finP ds BGC thatwill reco con gni titi nue on t of o th protect e s liability hould ca with reful the ly t following hink throu breakdown: gh the potenti "probable, al implicat $776 ions million; for PBG reasonably C of all policy possible, _ pay its liabilities ._ (benefit payments) _ for a_ considerable period of time" (Pension Benefit exposure. General Motors is the agency's largest premium payer.) The same three U.billion). them." _ In fact, current exposure is approximately _ 40 ___.o percent of the historic average of $59.9 billion. by 65, 40 years after plan termination. $13 billion; Most capitalized remote recently, , ins $18 additional titu billion." tions believed proposalsthey forcould change grow were their discussed way outinofthe their 1991 PBGC "imperfection" of the original statute came early. The 1976 report raised the potential proposals related to pensions and retiree health benefit plans. We should guard public Guaranty Corporation, 1991). companies are also responsible for 64 percent of the top 50 companies' unfunded PBGC is a stronger agency today than at any time in its history, both financially and in its legal authority. need Annual for p Report rhighe oblems. r to premiums, Congress. The rapidwhich Changes growth were oftoagency-guaranteed in the turn Bankruptcy increased Act inliabilities 19 were 77 from proposed does $1 to not $2.60. inappea The r to The 1989 annual report (the first to be signed by PBGC Executive Director James trust, an The d we report shoul states: d continue "PBGC to represents take actions a major that assur portion e that ofpthe romgovernment's ises made arehidden The agency's deficit, while trending upward over time, has exhibited a great deal liabilities. Funding ratios of plan sponsors listed ranged from 6 percent for LTV, to 94 Conclusion be the case with PBGC. Dallas L. Salisbury, November Lockhart) 1978 report noted 1991 stated: in that separate "P" BGC defined stu pieces dies benefit and of legislation pla research ns are healthier reflect (S. 1985 both and than aH.R. growing ever3837); before. awareness amended PBGC,of liabilities. promises kep The t. defined We shoubenefit ld "tell pension the peopl plans e" the insured truth; we by sh the oul PBGC d notcomprise "fear-mon more ger." than of volatility, particularly in the mid-to-late 1980s. The 1986 PBGC Annual Report placed Public confidence is something to be guarded. Cha It rt should 2 only be threatened if there is a real reason to do percent for National Steel, with an aggregate overall funding ratio of 75.5 percent. The President Does a general taxpayer bailout reminiscent of the "S&L fiasco" loom on PBGC's versions fundamental • Best of these judgmen defects billsts in have that are been that program fraud passed and and bypossible mismanagement their respective solutionschambers. existed that willinadd The about to President's the 60 percent long- however, remains exposed to the risk of some large underfunded pension plans...and is 20 percent of the nearly $4.5 trillion in federal insurance. Fortunately, the assets of the so. Comparison of PBGC to the '_&L fiasco" serves to imply that a large number of pension plans that no the deficit at $4 billion Asset due Distribution to LTV. of FSLIC The p Insured resent Savings deficit Institutions of $2.5 billion is higher than at underfunding of plans on the "Top 50" list is defined as unfunded guaranteed benefit Employee Benefit Research Institute ho FY rizon? 1993of Budget Th the ere S&L proposed arefailu currently res extensive andsufficient (as that of December it changes con liquid tributed 31 for ,as 1988) se PBGC ts to the witthat hin failure were the aggregate orintroduced the insolvency defined in in one term detethi rm nks strength ined are in toof trouble encourage the private are onbe thtter epens verge funding ion of sys failu trem. of e, th pe "at ns Th a ion ta axpaye t yea plans rr bailout PBGC and to is told imminen make Con it t,gr more an ess d tha that difficult t PBGC the is pension plans exceed liabilities by several hundred billion dollars. The worth of the any time other than 1986. While the reported deficit includes the present value of liabilities (liabilities for non-guaranteed benefits are not included). Being on the "Top in historically bad condition. None of these conditions exist. The unfortunate terminations of Eastern legislative benefit system perhaps form itby a se bo lfSenator ut to 25 cove pe rMajority rcent the exis of ti th Leader ng e cases. pockets Robert Evidence of Dole under of (S. funding such 2485)act and ivity withHouse inamong individual Minority single- Contingent for employers Employe to term rinate Liability thesePro under gram funded called pla forns by.... ERISA As we was continue "unworkable to protect and the sponsoring companies provides further security. Nevertheless, within a generally liabilities for future benefit payments, it makes no attempt to include future revenue 50" list does not mean the plan is in danger of a distress termination. PBGC estimates undesirable." and Pan Am, which increased PBGC liabilities in 1991, were anything but unexpected. The prospect of pla Leader ns. As Robert employer shown Michel pens in table ion (H.R. 2, plans P 4545) BGC's is last almost current March. non-exis expo Most sure tent. recently, represents Senator a sign James ificant Jeffords and pensions of workers and retirees, we look to the future with great confidence. This healthy defined benefit system, pockets of underfunded pensions can be found, receipts that will be available to at least partially cover these liabilities. According to that companies experiencing financial troubles accounted for $13 billion of pension plan liabilities from LTV were well known nearly a decade ago. Washington, D.C. Representa improvement • AS tive S&Ls for J.J. found the Pickle agency thintroduced emselves ; it currently co legislation nstrained stands proposing by at 40 limi pe tsrcent on further the of amount the reforms average they for over could the 19 PBGC 7 lend 8- confidence The 19 is 7 ba 9se re dport on outlined the soundness planned of the legisla defined tive pbe ronefit posalspension for thepla single ns, the employe recent r primarily in unionized manufacturing and transportation sectors of the economy." PBGC, current premium receipts total $790 million per year, while interest and underfunding in 1991, an increase from $8 billion in 1990. (S. 1986. 3162 Th to and erefo a single H.R. re, unless 5800). borrowe legisla The r they House tive began changes Ways to and sell areoff Means made pieces that Subcommittee ofcause the loan employers to on other Oversight to insti terminate tutions held p legislative rogram and changes reviewed that p reinfo roposed rced changes the program in the , and Multiemploye the quality r and program dedication , while of the the The report noted the bankruptcy reform legislation set forth in November 1991, dividend receipts currently approximate I Mortgage$3 Loans 05 53.8% million I per year (PBGC, 1991). Congress has a long history of careful monitoring of PBGC and legislative action when needed to avoid Seventy-five percent of the listed plans' underfunding is attributable to plan PBGC staff." well-funded a hearing(loan on defined these participation). proposals benefit pla Many onns August en-mas of these 11. se,sethus condadenying ry lenders PBGC relied a base on the of premium 1980 report contained further discussion of desired change and reported that the and promised funding and guarantee reform proposals as well (included in the 1992 any type of situation even resembling the "S&L fiasco." ERISA has been extremely successful in Table 2 compares PBGC's current reported exposure level with available figures sponsors in the airline, steel, auto, and tire industries, most of which sponsor fiat benefit 25 September 1992 payers, The underwriting a gene descriptions ral taxpayer capacities of the bailout PBGC of the would situation originat not in be have g necessary. S&L. revolved Although around a large the word propor"crisis," tion of strengthening Multiemployer The 1990 the ove changes re rpor all tinsu highlighted had red defin been ed ena be thnefi a ct t ed tthe system. (ME variable PP FA). urthe rate rmore, premium it shouldwas be emp increa hasized sed to that$19 the budget and introduced in legislative language in mid-1992). The annual report letter pla of past ns. P ex ension posure plan 2(Ippolito, underfunding 1989). 1990 for an exindividual posure ($25.6 plan billion) sponsor is lower on thethan top 50 at anytime list "S&L fiasco" had other features not found in the pension system (see pages 5-6). One important amid comparison Th defined is does be not nefit to the mean plan "S&L that asse fiasco." the ts are PBGC (Martin, placed progr in am 7/bank 28/92). doepooled s not Most have funds recently problems anditsimilar hasorbeen that per $1000 Theof 1981 unfunded report ou vested tlinedbesingle nefits employe with a maximum r program pechanges r participant that we cha rerge introd of $ uced 72 from PBGC Executive Director James Lockhart concludes: "Bankruptcy, funding, and be ranged tween fr19 om 78$4 ($116.9 7 million billion) to $7and .1 billion. 1986 ($49.2 It should billion). be noted In fact that , cusome rrent plan exposure sponsors is I distinction between the two programs is that funds are not generally available to the participant on in turned changes Congr into inves ess. are an tm not Th ents election needed. e 1982 where re issue po Changes the rt , with highlighted re is may statements a sharing be a needed request of being inves infor t made ment order higher that to resul reduce premiums can ts, only it " is abuse fundamentally beand said " and mo tore from $16 per $1000 of unfunded vested benefits with a maximum of $50 per participant guarantee reforms will ensure that PBGC can continue to Insured support Mortgages the /Mortgage defined Back benefit ed I approximately 40 percent of the historic average of $59.9 billion. PBGC is a stronger demand in a defined benefit pension plan prior to termination of employment. Securites At t15.8% hat point stretch the facts. ma legislative intaindifferent par pro tici po pan sals. than ts' loan Th reti ere1983 participatio mentres po ecur rtns irevi ty. that se As d have th currentl e premium been y s characterized tructu request red, tand heas pensi the "a transfe o proposals. n r of for the new fiscal year. The year brought a significant increase in the PBGC deficitI to pension system." ,_ 0 agency today than at any time in its history, both financially and in its legal authority. approximately 40 percent of plans offer a lump-sum option. Perhaps the most important difference insuranc Th 3Throughout e 1984 Iewas re syst this port at e discussion m PBGC found creates during terminatio a po a si financial ti n1977 ve basis income and refers ince1978. ntive toyea basing r If and or had funding employ athe poratios si privilege e ti rs ve on to claims benefi under of ts working accrued year fundwith and their with assets a higher defined $1.8 billion, with total liabilities of $5.1 billion and assets of $3.3 billion. The report Th risk is from review a par of ty PBGC whohis lac toks ry, cou fro rage m the to pers onepwho ectivelacof ks tknowledge. he 1976-1991''5PBGC between the two guarantee funds is that the likelihood that a plan insured by PBGC will fail is diversified accumulated at the end of the plan year--4he assumptions plans would use to calculate liabilities for Senators benefit plans. Jacob The Javits vast and ma Harrison jority of Williams sponsors maintain on early revisions well-fundeof d the plans PBGC despit statute. e this I po premium inted out request for thebut first a sp time reading that P of BGC the is deficit exposed being to fu about nded$20 from billion 10 years to $30 tobillion 15 years. in Annual •Re From ports1981 to Congress, to 1987, S&Ls suggests insured that by the FSLIC agency were and perm the itted Congrto essusehave accounting acted on a across several key industries whereas S&L guarantee funds were exposed exclusively to the risks of a standard terminations. Termination basis funding does not refer to PBGC's calculation of liabilities for had incentiv thee,honor butosome of_ directing do __ not. the _ Without study _ effort changes .___ that , und lederfunding to "reform"within of the the PBGC defined Multi- benefit unfunded single industry Thepens 1985 tha io tns re was .por extremely Th t p eus annual hedvulne for report rable legislative toletter fraud change no and ted: events that "Our beyond was long-te enacted its rm control. goal andisreto por oted perate consistent optibas onsis that to improve were not the inpro agrgr eement am and with the Gene underlying rally Accepted statute. Accoun The repo ting rts make unde 1Therfund breakd ed own termfo inations, r the estimated using tetax rmination expenditure mortality of $56 an .5 dbi reti llio rement n for emp ageloassum yer-provid ptions. ed pensions is as system is likely to slowly improve if historical trends continue. Were more firms to employer program and the present stability of that Other Loans program. 4.4% I have participated in u as po ansein rvice-oriented, the 1986 report financially (SEPPAA) solvent along and withpra ofessionally premium increa managed se to $8.50. insurance This clear follows:thprivate at Prindples thedefined overall (benefit, GAA stat Pus )$8.2 and of billion the have ; system private been defin has described ed remained contribution, as "strong self-decep $19.3 billion; , and tive public due accounting defin to past ed reforms 4pBGC derived its top 50 list using a computerized data base created by Standard & Poor's Compustat Review of PBGC history (see pages 6-10), from the perspective of the 1976-1991 PBGC Annual Reports to ._ __ begin be ongoing nefit, $ taking 27.reviews 9 billion, advantage and of public PBGC, of defined the including system contribu , tia on, the PBGC $1.1 financial billion. Advisory Keough picture Committee plans could had ad ta ex'ex teriorat Privatization penditu e. re of Task legislation company Service, Inc., th which fundamentally at se con rves tains as corpo a rsafety ate restr annual icted net repo for thre tsacir fo healthy rcumstances fiscal ,year growing s ending unde indefined r 1990. which PBGC benefit employers supplement pens edion could has gotten procedures stronger " over by the time. Execu Th tive e reports Directo also r ofstate PBGC. clearly In contrast, that the pension vast majority plans of must Congress, suggests that the agency and the Congress have acted on a consistent basis to improve the $2.7 billion and Individual retirement plans, $7.1 billion. (EBRIcompilation from Joint Committee on Sour the ce: databa EBRIse comwith pilatio da nfrom ta from Unite co drS porate tates Leag annu ue alofrepo Savi rts ngsfor Inst fiscal itution ys ear ,Sa s vY ending ngsInstit in ution 1989 s So and urceb earlie ookr (Wash fiscal in ygto ears, n,DC: Force in It 1982-83, must be r and ealized presently that gen serve eral by taxpayer appointment interestsof President lie as well Bush in policymakers on the PBGC system. terminate " an underfunded plan and "dump" liabilities on PBGC. The 1985 report also participants in defined benefit pension plans face no risk of accrued benefit loss. United Taxation Statesdata League and ofEBRI Savings estiInstitu mates tion by s,plan 1989). type.) program and the underlying statute. The reports make clear that the overall status of the system has and where available, 1987 and 1988 5500 forms. PBGC also sent letters to plan sponsors containing their giving Advisory attention Committee. to the long-term tax consequences of public pension and retiree medical stated, however: "Unfortunately, the legislation is not sufficient to secure the program's Reports from the General Accounting Office, the Congressional Budget Office, and the 5Koeppel, Jeffrey. "I'he Insolvency Looking Glass." Best's Review (September 1991): 37ff 2All remained plans' figures funding str are ong info in , rm 1986 and ation dolla duefo rs. r tocomment past reforms prior to haspublication. gotten stronger over time. The reports also state clearly EMPLOYEE BENEFIT RESEARCH INSTITUTE 8 4 9 7 3 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 Telephone 202-659-0670 FAX 202-775-6312