2 EBRI +-+ 756 4 8 PRIVATE PENSIONS AND THE PBGC: STRENGTH FOR THE FUTURE 3 L J trillion dollars in 1981. Private pension growth has been significant even occur at once, and that existing plans were to be assessed at once--not over a the single-employer upper end ofprogram. the range of market indices. Pension fund managers could have keeping plans fully-funded at all times could be foregoing benefit increases legislation governing private pension operations it must, as you fully appre- assets equal to or greater than the value of their total vested liabilities. when the effects of inflation are taken into account. Between 1975 and 1980, period bettered of even theirfive investment years -- performance to make upthroughout this funding theinsufficiency. last ten years This by plunging ent ire ly. Because of the size of the projected increase, and because it is paid ciate, do so on the basis of all the facts. Social Security, private pensions, Mr. Chairman, I am pleased to submit this statement for the record on Of the plans with fewer than 1000 participants, a third of the multi-employer pension plan assets grew at an average annual rate of 9.2 percent after assessment their entire would asset amount holdings to just into over 90-day 1 percent U.S. Treasury of private-plan bills, but, assets even with entirelyFunding by pension-plan status, ofsponsors, course, this is notrationale the only should measure beofexamined a pension plan's and other sources of income, are all needed if we hope to meet our common goal the funding status of private pension plans. plans and more than half of the single-employer plans were likewise adjusting for inflation. By comparison, state and local government pension outstanding at the end of 1981. If, instead, this funding deficiency were to health perfect carefully. or foresight, financial The projected such stability,a course premium though would increase under hardly current would haveresult law satisfied itinisholding probably I_ISA'sthe prudence the PBGC most to This statement focuses on the growth of pension-plan assets, the of providing adequate retirement income. Those who attempt to undermine confi- fully-funded or over-funded. And, with the exception of the larger plan assets grew 3.7 percent annually in real terms during this period. berequirements. amortized over i0 years, and, even if private-plan assets were not to grow important much higher one funding for measuring standards sociefor ty's thepotential liabilities responsibility in the plansforit aadminsters plan. dence in private pensions by inaccurately portraying the financial status of funding status and other indicators of pension-plan financial health, and the multi-employer plans, from half to three-quarters of all defined-benefit plans Private pension plans now provide nearly 9 percent of total credit available to THE ROLE OF FEDERAL BENEFIT GUARANTEES IN MAINTAINING BENEFIT SECURITY at all over the next ten years, the assessment needed to fund this deficiency Other than measures any private of plan plan financial would be allowed condition to meet includeunder pension the Employee costs asRetirement a percent the PBGC or of the private pension system do not serve the nation well. role of the Pension Benefit Guaranty Corporation (PBGC) in assuring benefit are at least 75 percent funded. financial markets and hold nearly a quarter of all corporate bonds and more would be one-tenth The Congress of one is percent currentlyofre-evaluating the assets ofthe private Pension plans Benefit each year. Guaranty ofIncome wages Security and salaries, Act (ERISA) or the and current applicable cost burden tax code of provisions. the plan to itsNo private sponsor, Today, we must join together to build confidence in Social Security, security and plan integrity. Our research suggests that both the PBGC and the Many large plans also appear to be well-backed by their sponsors' than 12 percent of corporate equities. We do not submit these arguments, Mr. Chairman, to dissuade the and Corporation's plan planfacing investment a funding role in returns. deficit the pension The would smaller system. be allowed theThe plan's PBGC to amortize burden was founded to it over thetosponsor, aguarantee periodthe of private pensions, and the nation's commitment to retirement income adequacy. private system promise long-term financial stability. As the Congress debates assets. More than 90 percent of the large corporate plans sampled in two The importance of pension plans in providing credit and investment Congress from considering changes in the Corporation's premium structure, more benefits lesslikely thaninten the defined years sponsorbenefit-plans it it is wished to continue toandclaim is the doing plan, tax deductions its and job the very hifor gherwell. the thecontribu- plan's The corpora- issues concerning the Social Security system and the private pension system, it recent studies had unfunded vested liabilities less than 20 percent of resources promises to increase even further. Additions to pension reserves Statement Submitted because tion currently such changes holdsmay adequate well beassets warranted. to pay We benefits do conclude in thefrom plansouritanalysis, admin- intions. vestment Likewise, return, no the private lower the pension burdenplan of would the planbe allowed to the sponsor. to fund its plan to is important that it do so on the basis of accurate data. sponsor's net worth. Since the Pension Benefit Guaranty Corporation can claim appear to have been one of the factors that kept savings rates from declining for the record howe isters ver,for thatmany theyears Corporation into the isfuture; far fromtotal insolvent, assets and in the thatsingle-employer a com- provide On benefits both offor thesemployees e measuresnotagain, yet onprithe vatepayroll, pension which plans isdisplay the equivalent con- THE GROWTH OF PENSION-PLANASSFFS up to 30 percent of a sponsor's net worth if a plan is terminated, such firms even more than they have in recent years. Pension plans may thus have helped pelling programcase at the hasend notof been fiscal madeyear for funding 1981 wereitsmore liabilities than ten this timesmuch current in excess annual siderable of what the strenCorporation gth. In plais nsasking with more theby Congress than 100to participants, let it do. pension contri- More than 28 million workers participate in defined-benefit plans. not only have no incentive to terminate their plans, but were they to do so, to offset the detrimental effects of inflation on Americans' choices between ofbenefit private-s payments. ector funding The PBGC standards. is trustee for 659 terminated plans, or less than butions average Not only 7 percent are there of questions labor costs,involved rising in to asking 37 perceplan nt of sponsors labor costs to pay Sophie M. Korczyk The PBGC's role in guaranteeing these workers' benefit security is more only they would bear the cost. Thus, the condition of the less than 2 percent spending and saving. Research Associate CONCLUSIONS one-tenth of one percent of all plans currently estimated in existence, and only for events in plans that withhave 10 or notfewer yet occurred; participants. there To areputalso these serious numbers problems in perspec- involved important than it has ever been, because defined-benefit plans are more of large plans with shaky sponsor backing isolated by Dr. Munne11 is not an THE FINANCIAL HEALTH AND STABILITY OF PRIVATE PENSION PLANS Employee Benefit Research Institute less than The2private percent pension of all the systdefined-benefit em is strong andplans growing. that ha Annual ve beenratterminated es of net tivin e, forecasting state and these local events. governmentsNearly contribut half ed the17.5 claims percent outstanding of payrollagainst to their the important than ever. Defined-benefit plans represented 71 percent of all plan accurate picture of the other 98 percent. to the This growth in pension plan asset holdings has had a favorable impact new since plan1974. formation Annual have netnot claims onlyagainst regainedthe their Corporation pre-ERIShhave, levels--they however, have been in- Corporation today arose from the termination of 8 large plans. Because there pension plans in 1980, and the Federal government contributed over 30 percent assets and a similar proportion of all plan participants in 1977. Over 15,000 What does underfunding mean to pension-plan participants? Does it on participant benefit security. Recently the Internal Revenue Service has House Select Committee on Aging surpassed creasing, and them.at In thefact, end of thefiscal over year 68,0001981 netthe newCorporation plans formedreported in 1981an are relatively few large plans, and each of them faces a unique set of of payroll to the Civil Service Retirement System and over 45 percent to the net new defined-benefit plans have been formed annually since 1971. New mean that their benefits are unsafe? More likely, it means one of three made its pension-plan disclosure data available for public use, thereby provid- exc actuarial eeded thedeficit highestofpre-ERISA $188.8 million. annual total by more than 20 percent. While Military circumstances, Retirement their System. terminationsJune are7, not1982 as predictable as, say, the incidence defined-contribution plans are being formed more rapidly, and the assets in things: ing researchers with data on the broadest and most representative group of most of theOnnew theplans basishave of its beencurrent defined-contribution deficit, the Corporation plans, defined-benefit is asking the of automobile Privateaccidents plans appear amongto groups have outperformed of drivers. most market indices in their defined-contribution plans are also growing at a faster rate. The larger size o their plan has been enriched, providing higher benefits; pension-plans available anywhere. plan Congress growthto Given has appro also theveuncertainty been a 131enjoying percent surrounding apremium resurgence. increase plan termination Current per participant rates forecasts, of inflation per year, there- capacity as investors of plan assets. The A.S. Hansen, Inc. Investment of the average new defined-benefit plan, however, means that defined-benefit o some participants have received retroactive service credits; or Our tabulations of IRS data for the 1977 plan year--the most recent and from fore, thethe it resulting current is usefulincreasing $2.60 to explore to $6.00. real theburd The impact enCorporation ofoftaxation alternative argues willprojections probably that thisfoster premium of future this Perfomance Survey is the single largest survey of pension-plan investment per- plans will maintain at least their current share of the covered population for o actual plan experience has diverged from what the actuary year for which data are available--suggest that the funding status of private increase would allow it to amortize its current actuarial deficit over five growth net claims as both on ethe mployers private andpension employesystem. es at allA income recent levels PBGC staff seekresearch to sheltpaper er formance, some time proto viding come.information on plans accounting for eight percent of all forecast, necessitating adjustments in funding to amortize these pension plans is better than previous small-sample studies had found. Of the income reviewed fromalternative taxation and measures maintain of the the real Corporation's value of their risk exposure retirement andsavings. found pri years vateasplan wellassets as allowing in 1980.it The to accumulate newest Hansen reserves survey against shows projected that in theincreases last The views in this statement are those of the author and do not necessarily High rates of new plan formation have led to significant growth in differences. defined-benefit plans with i000 or more participants--which account for more reflect the views of the Employee Benefit Research Institute, its in claims Theresulting ERISA legislation from futureisplan onlyfailures. eight yearsThese old.future Experience failures andwere the ten that, years,-- depending whichonwere how de risky vastating plans are timesidentified, for most financial the Corporation's asset holders exposure -- trustees, members or other staff. pension-plan asset holdings as well. Between 1976 and 1981, private pension Since the plan must amortize all of these changes over a period of time,funding than three-quarters of all participants in defined-benefit plans--more than a passage forecasted of time by assuming have pointed the Corporation's out some flawsnet inclaims ERISA that will should continue begrowing corrected. at fixed-income could range from fundsover matched $600or million exceeded to most $6 billion. indices Let of mark us eassume t performance. for a moment plan assets more than doubled in current dollar terms, reaching over half a is not likely to fully reflect them for a number of years. But the price of fifth of multi-employer plans and nearly half of single-employer plans had that the entire amount of claims forecast in the worst-case scenario were to Asthe thesame Congress average debates annualchanges rate experienced in the Social since Security the inception programof andthe in Equity funds failed to achieve this record, however, but did achieve returns at EMPLOYEE BENEFIT RESEARCH INSTITUTE IC)20 N ",tr,.'.t't. NIA \_.al.*hinlaton, D( 20036 Tt.lcphom. t 202) _:,_).0670