2 57 6 4 EBRI 8 • 3 trillion dolla_s in 1981. Private pension growth has been significant even PRIVATE PENSIONS AND THE PBGC: STRENGTH FOR THE FIYlIIRE the occur upper at once, end ofand thethat range existing of market plans indices. were toPension be assessed fundat managers once--not could over have a keeping plans fully-funded at all times could be foregoing benefit increases single-employer program. 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, bettered period oftheir eveninvestment five yearsperformance -- to make up throughout this funding the last insufficiency. ten years byThis plunging entirely. 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, Of the plans with fewer than I000 participants, a third of the multi-employer pension plan assets grew at an average annual rate of 9.2 percent after Mr. Chairman, I am pleased to submit this statement for the record on their assessment entirewould assetamount holdings to just intoover 90-day 1 percent U.S. Treasury of private-plan bills, but, assets even with Funding status, of course, is not the only measure of a pension plan's entirely by pension-plan sponsors, this rationale should be examined and other sources of income, are all needed if we hope to meet our common goal plans and more than half of the single-employer plans were likewise adjusting for inflation. By comparison, state and local government pension the funding status of private pension plans. perfect outstanding foresight, at thesuch end of a course 1981. would If, instead, hardly have thissatisfied funding deficiency ERISA's prudence were to health or financial stability, though under current law it is probably the most carefully. The projected premium increase would result in holding the PBGCto 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. This statement focuses on the growth of pension-plan assets, the re bequamortized irements.over l0 years, and, even if private-plan assets were not to grow much important higherone funding for measuring standards society's for the potenti iiabilitiesal responsibility in the plans for it adminsters a plan. dence in private pensions by inaccurately portraying the financial status of 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 funding status and other indicators of pension-plan financial health, and the 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 measures of plan financial condition include pension costs as a percent than any private plan would be allowed to meet under the Employee Retirement the PBGC or of the private pension system do not serve the nation well. are at least 75 percent funded. financial markets and hold nearly a quarter of all corporate bonds and more role of the Pension Benefit Guaranty Corporation (PBGC) in asssuring benefit would be The one-tenth Congress of is onecurrently percent of re-evaluating the assets of theprivate Pensionplans Benefit eachGuaranty year. of Income wagesSecurity and salaries, Act (ERISA) or the andcurrent applicable cost b tax urden codeofprovisions. the plan to No itsprivate sponsor, Today, we must join together to build confidence in Social Security, Many large plans also appear to be well-backed by their sponsors' than 12 percent of corporate equities. security and plan integrity. Our research suggests that both the PBGC and the We do not submit these arguments, Mr. Chairman, to dissuade the and Corporation's plan investment role in returns. the pension The system. smaller the Theplan's PBGC was burden founded to the to guarantee sponsor, the plan facing a funding deficit would be allowed to amortize it over a period of private pensions, and the nation's commitment to retirement income adequacy. assets. More than 90 percent of the large corporate plans sampled in two The importance of pension plans in providing credit and investment private system promise long-term financial stability. As the Congress debates benefits Congressin from defined considering benefit-plans changesand in the is doing Corporation's its job very premium well. structure, The corpora- more less likely than tenthe years sponsor it itiswished to continue to claim the tax plan, deductions and the higher for the the contribu- plan's recent studies had unfunded vested liabilities less than 20 percent of resources promises to increase even further. Additions to pension reserves issues concerning the Social Security system and the private pension system, it tion because currently such changes holds adequate may well assets be warranted. to pay benefits We do conclude in the plans from our it admin- analysis, investment return, the lower the burden of the plan to the sponsor. tions. Likewise, no private pension plan would be allowed to fund its plan to sponsor's net worth. Since the Pension Benefit Guaranty Corporation can claim Statement of appear to have been one of the factors that kept savings rates from declining is important that it do so on the basis of accurate data. isters however, forthat manythe years Corporation into theis future; far from total insolvent, assets inand thethat single-employer a com- On both of these measures again, private pension plans display con- provide benefits for employees not yet on the payroll, which is the equivalent up to 30 percent of a sponsor's net worth if a plan is terminated, such firms Sophie M. Korczyk even THE GROWTH more than OF PENSION-PlPd_ they have in ASSETS recent years. Pension plans may thus have helped Research Associate program pelling at case thehas endnot ofbeen fiscal made year for1981 funding were its moreliabilities than ten times thiscurrent much inannual excess siderable of what thestrength. CorporationIn plans is asking with the moreCongress than 100 toparticipants, let it do. pension contri- 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 More than 28 million workers participate in defined-benefit plans. benefit of private-sector payments. funding The PBGCstandards. is trustee for 659 terminated plans, or less than butions average 7 percent of labor costs, rising to 37 percent of labor costs Not only are there questions involved in asking plan sponsors to pay only they would bear the cost. Thus, the condition of the less than 2 percent Employee Benefit Research Institute spending and saving. The PBGC's role in guaranteeing these workers' benefit security is more CONCLUSIONS one-tenth of one percent of all plans currently estimated in existence, and only for events in plans thatwith haveI0 not or fewer yet occurred; participants. there are To put also these seriousnumbers problems in perspec- involved of large plans with shaky sponsor backing isolated by Dr. Munnell is not an before the THE FINANCIAL HEALTH AND STABILITY OF PRIVATE PENSION PLANS important than it has ever been, because defined-benefit plans are more less thanT2hepercent privateofpension all thesystem defined-benefit is strong and plans growing. that have Annual been rates terminated of net tive, state and local governments contributed 17.5 percent of payroll to their in forecasting these events. Nearly half the claims outstanding against the accurate picture of the other 98 percent. Subcommittee on Labor of the This growth in pension plan asset holdings has had a favorable impact important than ever. Defined-benefit plans represented 71 percent of all plan since 1974. Annual net claims against the Corporation have, however, been in- new plan formation have not only regained their pre-ERISA levels--they have pension Corporationplanstoday in 1980, arose and fromthe theFederal termination government of 8 contributed large plans. over Because 30 percent there What does underfunding mean to pension-plan participants? Does it Senate Committee on Labor and on participant benefit security. Recently the Internal Revenue Service has assets and a similar proportion of all plan participants in 1977. Over 15,000 Human Resources creasing, and at the end of fiscal year 1981 the Corporation reported an surpassed them. In fact, the over 68,000 net new plans formed in 1981 of are payroll relativelyto the fewCivil large Service plans, Retirement and each ofSystem them faces and over a unique 45 percent set ofto the 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- net new defined-benefit plans have been formed annually since 1971. New actuarial exceeded the deficit highest of pre-ERISA $188.8 million. annual total by more than 20 percent. While Military Retirement System. circumstances, their terminations are not as predictable as, say, the incidence things: ing researchers with data on the broadest and most representative group of defined-contribution plans are being formed more rapidly, and the assets in May 19, 1982 most of the On the newbasis plans of have itsbeen current defined-contribution deficit, the Corporation plans, defined-benefit is asking the of automobile Private accidents plans appear among to groups have ofoutperformed drivers. most market indices in their o their plan has been enriched, providing higher benefits; pension-plans available anywhere. defined-contribution plans are also growing at a faster rate. The larger size Congress plan growth to approve has alsoabeen 131 percent enjoyingpremium a resurgence. increaseCurrent per participant rates ofper inflation year, capacity as Given investors the uncertainty of plan assets. surrounding The A.S. plan Hansen, terminationInc. forecasts Investment , there- o some participants have received retroactive service credits; or Our tabulations of IRS data for the 1977 plan year--the most recent of the average new defined-benefit plan, however, means that defined-benefit and the resulting increasing real burden of taxation will probably foster this from the current $2.60 to $6.00. The Corporation argues that this premium Perfomance fore, it isSur useful vey is to the explore singlethelargest impact survey of alternative of pension-plan projections investment of future per- o actual plan experience has diverged from what the actuary year for which data are available--suggest that the funding status of private plans will maintain at least their current share of the covered population for increase would allow it to amortize its current actuarial deficit over five growth as both employers and employees at all income levels seek to shelter formance, net claims pro onviding the private information pensionon system. plans accounting A recent for PBGCeight staff percent research of paper all forecast, necessitating adjustments in funding to amortize these some time to come. pension plans is better than previous small-sample studies had found. Of the income from taxation and maintain the real value of their retirement savings. The yearsviews as well in this as allowing statemente itare to accumulate those of the reserves authoragainst and do notnecessarily projected increases pri reviewed vate plan alternative assets in measures 1980. The of the newest Corporation's Hansen survrisk ey shows exposure that and in the foundlast differences. reflect the views of the Employee Benefit Research Institute, its defined-benefit plans with i000 or more participants--which account for more High rates of new plan formation have led to significant growth in trustees, members, or other staff. in claims The resulting ERISA legislation from future is plan only failures. eight years These old. future Experience failuresand were the ten years,-- which were devastating times for most financial asset holders -- that, depending on how risky plans are identified, the Corporation's exposure 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 pension-plan asset holdings as well. Between 1976 and 1981, private pension forecasted by assuming the Corporation's net claims will continue growing at passage of time have pointed out some flaws in I_ISA that should be corrected. could fixed-income range from funds over matched $600 million or exceeded to $6 most billion. indices Lof et market us assume performance. for a moment 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 plan assets more than doubled in current dollar terms, reaching over half a that the entire amount of claims forecast in the worst-case scenario were to Equity the As the same funds Congress average failed debates annual to achie rate changes veexperienced this in the record, Social since however, Securit the inception but y program did of achie and the veinreturns at EMPLOYEE BENEFIT RESEARCH INSTITUTE Iq2'Y N _tr,,t \\_ \X,_.hin_t,,n. I)_ 2,.'_L;_,_, h'h'phont _:0. _10:_*)+0070