Table of Contents
This report was produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, which was created by ERISA to provide advice to the Secretary of Labor. The contents of this report do not necessarily represent the position of the Department of Labor.
November 7, 2003
Working Group Issue Statement
In 1987 Congress provided that pension liabilities would, for certain purposes, be valued using the 30-year Treasury interest rate.
Treasury no longer issues 30-year notes. In 2002 Congress enacted a temporary measure, good for plan years beginning in 2002 and 2003, which allowed plans to use a rate up to 120 percent of the 30-year Treasury rate. Most people seem to agree that this question needs a permanent resolution. Alternatives include, but are not limited to: retaining the 30-year Treasury rate, using the rate on long-term corporate bonds, and using a yield curve to set plan specific rates, with different rates matching liabilities of different maturities.
The issue of an appropriate interest rate cannot be considered in a vacuum, for the discount rate for valuing liabilities is only one piece of the overall funding regime for defined benefit plans. Plans are established, managed and funded with a long-term perspective; ultimately, the question is whether the funding rules result in adequately funded plans that will be able to satisfy their liabilities to participants without subjecting the plan sponsor to larger-than-necessary contributions or volatile cash-flow demands. Recent events in the capital markets suggest that some of the funding rules may be inadequate or in some cases destabilizing to the goal of providing employees with retirement income security. Our study may, then, also seek to identify other potential problems with the funding rules.
The working group recognizes that many funding questions are within the jurisdiction of the Treasury Department. However, the funding rules that appear in the IRC are replicated in ERISA. The Department of Labor has an interest in the viability of defined benefit plan system and the financial position of the PBGC. Our goal then in this report is to concentrate on general long term issues that relate to defined benefit plan funding. In most cases we do not make specific recommendations. We hope that our findings and the testimony of a diverse set of witnesses will be of value in informing the effort to find the right balance to protect the defined benefit plan pension system.
At our first meeting, on June 26, 2003, the working group heard testimony from Vince Snowbarger, Assistant Executive Director for Legislative Affairs, Jane Pacelli, Chief Research Actuary, Corporate Policy and Research Department, Stuart Sirkin, Director, Corporate Policy and Research Department, all on behalf of the Pension Benefit Guaranty Corporation; Kenneth Porter, DuPont, Director, Global Benefits Financial Planning, on behalf of the ERISA Industry Committee; Kenneth Steiner, Resource Actuary, Watson Wyatt Worldwide, on behalf of the American Benefits Council; Howard Kurpit, V.P. & Senior Actuary, MetLife; Shaun O’Brien, Assistant Director, Public Policy, AFL-CIO; and Adrien R. LaBombarde, Consulting Actuary, Milliman USA, speaking on his own behalf. After hearing testimony, the working group discussed the issues under consideration and potential witnesses for the next meeting.
At our second meeting, on July 24, 2003, the working group heard testimony from Kenneth A. Kent, Mercer Human Resource Consulting and Incoming Vice President of the Academy's Pension Practice Council, on behalf of the American Academy of Actuaries; Christian Weller, Macro Economist, Economic Policy Institute; Judith F. Mazo, Senior Vice President and National Director of Research, The Segal Company, who testified in various parts on behalf of herself, The Segal Company, and the National Coordinating Committee on Multiemployer Plans; Duane E. Woerth, President, Air Line Pilots Association, International; Peter M. Kelly, II, Partner, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., on behalf of the U.S. Chamber of Commerce; Steve Berkley, Managing Director and Global Head of Fixed-Income Indices, Lehman Brothers; Jeremy Gold, Jeremy Gold Pensions; and Ronald Ryan, President, Ryan Labs, Inc. At the end of the testimony, the working group discussed its progress to date, and began to outline areas of potential consensus for possible recommendations.
At our third meeting, a telephone meeting on September 23, 2003, the working group discussed a draft of its report, including findings and potential areas of consensus.
It is important that plan regulations recognize the importance of defined benefit plans and support the continued ability of employers to sponsor defined benefit plans.
The unique characteristics of defined benefit plans provide advantages to employers and employees. For employees, defined benefit plans provide security with respect to mortality and investment risk. Because defined benefit plans typically pay benefits in the form of an annuity, retirees receive a predictable income stream. The Pension Benefit Guaranty Corporation (PBGC) program provides a residual layer of protection in instances of employer insolvency. And, defined benefit plans are effective at providing substantial benefits to mid-career hires. From the perspective of employers, defined benefit plans can be attractive devices in the recruiting and retention of employees. They also provide a mechanism for employers to influence the timing of employee retirement. In addition, the plans offer some funding flexibility and the ability to provide past service credits.
No witness testified that defined benefit plans should be viewed as an historical artifact. Instead, numerous witnesses spoke to the importance of retaining a regulatory system that supports the sponsorship of defined benefit plans. Although defined benefit plans now constitute a smaller percentage of the overall plan universe than in the past, the number of participants with some level of coverage by those plans has actually increased significantly since 1980. Defined benefit plans have remained particularly popular in specific industries and in the collectively bargained context. In testimony, Shaun O’Brien, Assistant Director, Public Policy at the AFL-CIO testified on: “the importance of DB plans to the labor movement. In the private sector approximately 70% of AFL-CIO members are DB plan participants. That compares to approximately 1 in 7 of the non-union workers in the private sector.” Captain Duane E. Woerth, President of the Air Line Pilots Association, International, informed the working group that in industries, like the airlines, where people tend to stay at one employer and some of them must, by law, retire early, defined benefit plans provide an important source of retirement income.
Business representatives also testified in favor of the retention of defined benefit plans and regulation to support such retention. Speaking on behalf of the U.S. Chamber of Commerce, Peter M. Kelly, II, a partner at Ogletree, Deakins, Nash, Smoak & Stewart, P.C., said that businesses support the concept of defined benefit plans and believe they are an important part of employee compensation systems. Kenneth Porter, The Director of Global Benefits Financial Planning at DuPont, testified on behalf of the ERISA Industry Committee (ERIC) and stated that “ERIC’s interest in funding is strong because 95% of its members sponsor a defined benefit plan.”
Some witnesses expressed concern with the current status of the defined benefit plan system. Judith F. Mazo, Senior Vice President and National Director of Research at The Segal Company, said that “defined benefit plans should have a future” and reminded the working group of the need to balance interests. In her words regulators need to consider whether “we want more secure retirement plans or do we want more retirement security? … [T]hose are two different things. And we probably can't have both.” And, the American Benefits Council (ABC), through its representative, Kenneth Steiner, Resource Actuary at Watson Wyatt Worldwide, expressed concern about the decline in the raw number of defined benefit plans, to less than 33,000 in 2002.
The defined benefit plan system faces funding challenges, both short and long term. The short term problems are basically those of volatility and the large contributions that some employers have been required to make in recent years. The long term challenges include the same volatility issues and whether the plans will be able to meet their benefit obligations over the plans’ lives.
For some plan sponsors, especially those who have had plans in place for a substantial time period, the size of defined benefit plan obligations as compared to both plan assets and company assets has grown substantially. In the short term, when contribution obligations are volatile and come at times of financial stress at the plan sponsor, the sponsor may face an issue between its own viability and funding the plan. The situation is complicated by the fact that fiscal strains at plan sponsors may not be predictable and are not always solely a matter of business cycle or competitive pressures. For example, Captain Duane Woerth testified that the airline industry currently is in the midst of a fundamental business crisis, because of the events of September 11, 2001, SARs, and the Iraq war, that could not have been predicted and that requires industry-specific funding relief.
Most witnesses, including Peter Kelly, Shaun O’Brien, Kenneth Porter, Kenneth Steiner, Duane Woerth, as well as Adrien R. LaBombarde, Consulting Actuary at Milliman USA, stated emphatically that in the long term funding rules must be stable and result in predictable levels of funding. Business must make long term forecasts known to securities analysts, lenders, vendors, and other interested business partners. Predictability of the obligations is also important to the collective bargaining process.
The appropriate level of required defined benefit plan funding, even in the long term, is one about which witnesses expressed various views and perspectives. The PBGC stressed that funding risks are particularly strong for companies with below investment grade debt and large unfunded liabilities contingent on shutdown of plants. Judith Mazo opined that requiring full funding at all times will discourage plan sponsorship and lead to plan freezes and terminations. In her view, some balance must be retained between funding requirements and giving plan sponsors some flexibility in funding. Furthermore, different categories of plans raise different issues. For example, the multiemployer plan system has not experienced the same level of funding challenges as the single-employer system.
On the other hand, Jeremy Gold, proprietor of Jeremy Gold Pensions, and Ronald Ryan, President of Ryan Labs, Inc., both testified that funding rules that permit plans to be less than fully funded on a termination basis risk breach of the pension promise made to employees. Furthermore, underfunding in the long term can result in the transfer of liabilities to the PBGC (and perhaps to the federal government (and ultimately the taxpayers), which does not have formal responsibility for these plans.).
A wide variety of principles affect defined benefit plan funding and should be considered as part of any long term comprehensive reform.
Ken Porter, in his testimony on behalf of ERIC, placed the short term debate about the discount rate in perspective when he stated that: “if we have one message that we would pass on today, …that is that as we're debating the urgency around the 30 year bond, that we not confuse that with the long term funding, which is a whole other issue, and perhaps another issue for discussion. And even the broader issue of rethinking what a long term pension policy is for this nation, and making sure that we test everything we do against that policy.” Representatives from ABC and the AFL-CIO also supported in-depth reviews of the defined benefit plan funding rules.
The two concepts that came up repeatedly as most important in any long term, comprehensive consideration of defined benefit plan funding were stability and predictability. At the same time, adequacy has a place in the equation, though witnesses disagreed about what constitutes funding adequacy,. Even given the premise that funding reform must achieve stability, predictability, and adequacy, a wide variety of other principles are appropriate for consideration. Based on witness testimony, written submissions, and working group discussions, the following discussion outlines many of those principles. Some are addressed in detail, while others are simply noted.
Annuity Pricing. Howard Kurpit, Vice President and Senior Actuary at MetLife testified on his own behalf that numerous factors go into the calculation of group annuity purchase rates. Those factors include the demographics of the participant and beneficiary population, including whether benefits will be paid currently or deferred, mortality assumptions, and early retirement assumptions. The overall value of the liabilities also is a factor, though increased liability amounts will not in all cases lead to lower annuity pricing. In short, the pricing is highly individualistic based on the characteristics of each particular plan. Understanding the nature of group annuity purchases is fundamental if the funding rules are intended to ensure that defined benefit plans are adequately funded to purchase annuities to pay benefit obligations.
Mortality Adjustments. The AFL-CIO’s testimony addressed the use of mortality assumptions in the measurement of defined benefit plan liability. The AFL-CIO supports the voluntary ability of companies to use collar adjustment factors to mortality tables. The voluntary use of collar adjustment factors would become even more important if a yield curve is used to calculate plan discount rates.
Solvency. Jeremy Gold advocated three principles that should undergird any long term funding reform. He testified that the system should be one that encourages plan sponsors to be: “cautious in granting benefits, quick to fund promised benefits, and reluctant to mismatch assets and liabilities.” Ronald Ryan strongly supported Jeremy Gold’s point on matching assets and liabilities. His position is that it is important that discounting of plan liabilities be matched to the term of a plan’s liabilities as would occur in all other areas of liability calculations. He also explained that matching of assets and liabilities is the approach required by the Securities and Exchange Commission and the Financial Accounting Standards Board.
One important factor in the funding of defined benefit plans is the discount rate used to calculate plan liabilities for the deficit reduction contribution and certain other calculation purposes. In the long term the 30-year Treasury rate will have to be permanently replaced with an appropriate rate unless the government begins reissuing 30-year bonds. Moreover, there are questions about the appropriateness of the 30-year bond rate even if the government resumes issuing those bonds.
The basis used to develop the discount rate and the use of a yield curve to value defined benefit pension plan liabilities for deficit reduction contribution and other calculation purposes is an issue of short term debate, but also requires long term consideration. Every witness provided some perspective or information on the discount rate issue. Representatives from the PBGC helped place the rest of the testimony in perspective by telling the working group that the current levels of defined benefit plan underfunding implicitly remind us that the discount rate is a critical component of plan funding, but it is only one component. Judith Mazo argued that the funding rules need to balance the interests of plan sponsors and provide them with flexibility while also protecting participants.
Most of the testimony on the discount rate issue can be summarized along one of two approaches. First, witnesses addressed what underlying factor or factors should be used to set the discount rate. Second, they gave views on the appropriateness of the use of a yield curve.
ERIC, ABC, the AFL-CIO, the American Academy of Actuaries, ALPA, and the U.S. Chamber of Commerce all supported the use of a rate based on corporate bonds. Still, there was some difference in perspective among representatives of the various organizations. ERIC called for use of a long-term high-grade corporate bond index with some governmental monitoring. Shaun O’Brien explained that the AFL-CIO supports the use of a corporate bond rate because it believes that substantial support has developed for use of that rate and, as such, it seems to be the best way to implement short term relief, which the AFL-CIO views as critical. However, the AFL-CIO prefers a legislative approach that spells out the duration and quality level of the bond indices in some detail so that the discretion accorded to Treasury is somewhat circumscribed. ALPA specifically advocated the use of at least three indices in building a long-term corporate bond rate.
In contrast, Jeremy Gold, Ronald Ryan, and Steven Berkley objected to the use of long term, high-grade corporate bond indices to set the discount rate. Ronald Ryan explained that there are issues of purchasability with such corporate bonds. That makes their use as a rate setting device inappropriate because he believes that plans should be able to purchase the investment vehicles used to set the rates. That would enable plans to match liabilities and assets. Specifically, he advocated the sale of government bonds at whatever durations there is a market for, including 30 years. For similar reasons, Jeremy Gold advocated use of U.S. Treasury instruments for setting the rate. Both Mr. Gold and Mr. Ryan suggested that fixed income securities are appropriate mechanisms for the discount rate and for plan investments. Finally, Steven Berkley discussed the very limited depth and breadth that exists in the long term, high-grade corporate bond markets. The long AAA credit index contains only 50 securities with $26 billion, and the long AA is 152 securities for $70 billion. Instead, he suggested use of an index such as the Long Government Credit Index. Ronald Ryan noted, as a matter of comparative scale, that “a $1 billion Treasury issue is considered an odd lot.”
Howard Kurpit, Adrien LaBombarde, and Christian Weller offered different insights on the mechanism used to set a rate. Howard explained the importance of the interest rate assumption in the pricing of annuities and how serious an incorrect assumption can be for pricing. Adrien LaBombarde said that the theoretically correct rate is one that matches the annuitization rate, but that such a rate is difficult to quantify. He also expressed discomfort with using a nongovernmental index to establish the discount rate. If outside indices were used, he suggested designating a panel of government agencies to set the rate. Christian Weller’s focus was on smoothing and he advocated a rate that would be smoothed over a long time period. His research indicates that this would lead to less volatility in funding as well as higher funding levels.
Witnesses were also divided in their views on whether a yield curve should be used to establish a discount rate. Jeremy Gold and Ronald Ryan argued strongly in favor of use of a yield curve. In all other areas of the financial markets, liabilities are priced using such a curve. However, they both believed that a corporate bond rate would be inappropriate to use as the basis for a yield curve. Howard Kurpit implicitly supported this view when he explained the need to match durations of investments to the timing of payment obligation in pricing annuities. And, Adrien LaBombarde supported a rate structure that includes “a reflection of the maturity of actuarial liability.” He stated that various approaches could minimize the complexity that some people fear a yield curve could create.
ERIC, ABC, the AFL-CIO, ALPA and the U.S. Chamber of Commerce, however, objected to the use of a yield curve. ALPA framed its objection in terms of volatility, believing that a yield curve could increase the volatility in plan contribution requirements. The most general concerns expressed, though, were with the potential complexity and costs associated with a yield curve. It does appear that some reprogramming and actuarial work would be required to implement a yield curve concept.
Two other witnesses offered thoughts on a yield curve. The American Academy of Actuaries stated that it has “concerns with the bond yield curve, partly because of the fact that it's not been well studied in different economic conditions.” Specifically, Mr. Kent referred to the possibility of an inverted yield curve. In response to questioning, Christian Weller stated that if portfolio mix shifts as a result of the use of a yield curve, that will have significant effects on the capital markets. He said that he had not attempted to model those effects and could not predict the details of the effects.
One possible approach to increasing the security of defined benefit pensions without unduly burdening plan sponsors is to increase the ability of plan sponsors to contribute to defined benefit plans during favorable economic periods.
Some witnesses testified, either implicitly or explicitly in favor of permitting plan sponsors to make additional contributions to defined benefit plans during years when the plan sponsor can afford to do so. ABC specifically criticized the funding rules to the extent they “strongly encourage employers to keep their plans as near as possible to the minimum funding level instead of providing a healthy financial cushion above that level.” Similarly, the U.S. Chamber of Commerce advocated the voluntary ability of plan sponsors to contribute in excess of the current full funding limits to plans. Also, it believes that employers should receive tax deductions for contributions in excess of what is currently allowed. The American Academy of Actuaries observed that current funding rules actually create a counter-cyclical funding burden by requiring more contributions during a recession than during other times. Less counter-cyclical rules would make it less likely that employers would have to make cash contributions when the economy is weak, and more likely that employers will contribute when the economy is strong and business is flush.
One question that would need to be addressed if additional contributions were to be permitted is the appropriate funding target and the level of any caps on contributions. Adrien LaBombarde estimated that, if a corporate bond basis were used, an appropriate funding target might be 125 to 130 percent. ALPA recommended amending the funding rules to permit but not require additional funding up to 130 percent of current liability and to allow employers to take into account future expected salary increases when making funding calculations. Christian Weller’s research modeled a requirement to fund at a level of 120 percent.
The volatility that results from the deficit reduction contribution rules causes the overall operation of the funding rules to behave in unintended ways. Sometimes the deficit reduction contribution rules achieve their objectives, but other times they do not.
PBGC testimony used the example of Bethlehem Steel to illustrate the problematic operation of the deficit reduction contribution (DRC). First, unless funding drops below 90 percent, measured on a current liability basis, no DRC, participant notice, or variable rate premium is required. In the case of Bethlehem Steel’s plan, during the late 1990s, its funding bounced above and below the 90 percent threshold. This limited both participant notices and required contributions. As recently as 2000, the plan reported funding of 86 percent. But, when the PBGC assumed responsibility for the plan in December of 2002, the plan was only 45 percent funded.
The working group heard testimony on two perspectives of the principles underlying the DRC. According to ERIC, the original rationale for the DRC was that at some level funding becomes so inadequate that a plan faces “an immediate and impending liquidity crisis…” But, under the current system, volatility of contribution requirements is an issue for plan sponsors. In response, ERIC recommended a modification to the DRC period to increase the look back period for 90% funding to four years. Adrien LaBombarde offered a slightly different view from his recollection of working on the original DRC legislation. He testified that the DRC: “was primarily intended for dealing with corporate decisions to increase benefits even though the plan was not sufficiently funded . . . . We were not looking at a Black Monday and the fall of interest rates to 40 year lows. And it was this interest rate risk that the deficit reduction contribution was not designed to deal with.”
Both the American Academy of Actuaries and ALPA also offered testimony on DRC issues. The Academy’s position is that solvency correction should be more gradual than currently required by the combination of the 30-year bond rate and the DRC. ALPA testified that the airlines currently need relief from the DRC because of the unique financial position of the airlines. Unlike steel, the airlines are not an industry in long term decline. Instead, the need is one that results from the current business cycle and a confluence of factors that hit the airline industry.
It is important that plan regulations recognize the importance of defined benefit plans and support the continued ability of employers to sponsor defined benefit plans.
Consensus: The working group believes that the law and regulation should support employers in choosing and maintaining defined benefit plans where those plans best meet the retirement planning needs of the employer and its workforce. These plans will be of particular importance as the workforce ages over the next few decades. Regulation must balance the needs of employees and employers in order to support a robust defined benefit plan system.
The defined benefit plan system faces funding challenges, both short and long term. The short term problems are basically those of volatility and the large contributions that some employers have been required to make in recent years. The long term challenges include the same volatility issues and whether the plans will be able to meet their benefit obligations over the plans’ lives. What is needed is a permanent long term solution that results from a comprehensive review of the funding rules and the PBGC’s responsibilities.
Consensus: The working group believes that defined benefit plans have been hit by the “perfect storm” of declining interest rates, weak equity markets, and a business slowdown. However, this is a “perfect storm” that may reoccur during future business cycles and defined benefit plan regulation should account for that. Future events, some of them predictable, such as the aging of the population, and others unpredictable, may present different types of challenges to the defined benefit plan system. To the extent possible, the funding rules need to anticipate such events. As is true in most areas of the law, rules evolve with circumstances and it is important that the lessons from the perfect storm not be lost.
The confluence of negative factors has resulted in many defined benefit pension plans becoming significantly under funded on a termination basis, even where the plans were fully or nearly fully funded as recently as 1999 or 2000. While people may disagree on the availability of or appropriate form of temporary relief, the working group believes it is important to learn from the current problems and work toward modifications to the funding rules that would avoid a reoccurrence of these funding problems in the long term. In addition, the working group is of the view that funding requirements, as with all the regulatory provisions affecting defined benefit plans, must recognize that the system is a voluntary one. Finally, the working group believes that as the economy improves, interest rates may return to more historically normal rates and equity markets become stronger, that there would then be an opportunity to solidify the funding of defined benefit plans. It will be important at that time that policy makers recognize the opportunity and not turn from this problem simply because positive economic conditions temporarily mask the underlying problem. A review of funding rules should be completed as soon as reasonably possible in order to maximize that window of opportunity for plan funding.
A wide variety of principles affect defined benefit plan funding and should be considered as part of any long-term comprehensive reform.
Consensus: The defined benefit plan system is one that provides employers an opportunity to offer valuable benefits to employees and the working group believes it is important to support the long-term viability of that system. Regulation, with respect to funding as with other types of defined benefit plan regulation, must balance the protection of participants and beneficiaries with the obligations borne by employers. At the same time regulation must keep in mind the risk to the PBGC and to the federal government (and ultimately the taxpayers), which is expected to backstop the system.
Our hearings surfaced many suggestions on ways in which the long term funding challenges can be addressed. Members of the group have differing views on how best to structure the details of the funding rules for the long term. We do, however, believe that the basic values to be sought are:
- the ability of plan participants and beneficiaries to receive plan benefits,
- the ability of plan sponsors to fund plans without unreasonable volatility, especially volatility that is countercyclical as compared to economic cycles, and
- sufficient funding requirements to enable the PBGC to backstop the system while maintaining a reasonable premium structure and without needing to rely on the federal fisc.
In its findings, this report sets forth numerous considerations and perspectives for consideration in developing long term, comprehensive reform. But, the working group emphasizes that some of those perspectives are addressed in significant detail, while others are simply noted. That is primarily a factor of the limited time we had for testimony.
One important factor in the funding of defined benefit plans is the discount rate used to calculate plan liabilities for the deficit reduction contribution and certain other calculation purposes. In the long term the 30-year Treasury rate will have to be permanently replaced with an appropriate rate unless the government begins reissuing 30-year bonds. Moreover, there are questions about the appropriateness of the 30-year bond rate even if the government resumes issuing those bonds.
Consensus: The working group recognizes that a variety of positions exist on the appropriate discount rate and whether a yield curve should be used to value defined benefit plan liabilities, particularly in the near term. As important as it is to resolve the short term question of a discount rate, the working group believes that, in the long term, attention to the discount rate alone will not be sufficient to ensure appropriate defined benefit plan funding and reasonable contribution levels.
Each approach outlined in the findings has some support from within the working group but the group did not develop a consensus position on a single approach. The working group does agree that four principles should be used in setting the discount rate used to calculate plan liabilities for the DRC and other calculation purposes. Those principles are to minimize volatility, ensure plans are funded over the long term, encourage defined benefit plan sponsorship, and protect against contribution requirements that become so great that they compromise the fiscal integrity of plan sponsors.
To increase the security of defined benefit pensions without unduly burdening plan sponsors, the full funding limits on plan contributions should be relaxed.
Consensus: The working group believes that the upward limit current collars, which constrain defined plan funding and will become even more problematic after the sunset of EGTRRA, should be relaxed. The group, however, recognizes that the tax treatment of contributions attempts to balance benefit security and employer burdens against the revenue loss that would occur with unlimited deductibility. Primary responsibility for making the policy considerations necessary to establish that balance lies with the Treasury Department and the working group does not attempt to identify the specific appropriate level of deductibility. The working group does note that multiemployer plans present different issues and may require a different balance and a modified approach.
The deficit reduction contribution rules should be reviewed with an eye toward decreasing volatility, increasing predictability, and ensuring that they achieve funding objectives.
Consensus: The very high DRCs currently being required of plan sponsors who just a few years ago were precluded from making any plan contributions is a significant source of concern and should be examined as part of any long term comprehensive reform. The working group did not hear enough testimony on specific proposals to make particularized recommendations on modifications to the DRC. However, the recent recessionary cycle, which is the first in which the DRC has been “stress tested,” has surfaced the problems associated with the very large contributions that can be required of corporations under the current DRC framework. The economic cycle also has provided examples, such as that of Bethlehem Steel, of other unintended consequences that flow from the DRC rules.
In concept, the working group finds that funding requirements that are unreasonably volatile and do not realistically take into account the ability of business to make contributions may unduly discourage defined benefit plan sponsorship. From this perspective, the DRC and its intersection with other funding provisions, in particular the full funding limits, is deserving of further review.
The working group supports establishment of a commission to study defined benefit plan funding and suggest standards for long term comprehensive reform.
Consensus: Given the importance of the defined benefit plan system, the aging of the population, and the need to fund other social programs, legislative attention to defined benefit plan funding cannot be limited to a series of short term fixes. Plan sponsors, participants, and other stakeholders in the defined benefit plan system need appropriate and permanent funding rules that balance volatility concerns, sufficient funding, and efficient regulation. A commission should be constituted to study these issues and make recommendations for reform.
Summary of Testimony of Vince Snowbarger, Jane Pacelli, Stuart Sirkin
The PBGC testified before the Working Group to provide background information on how the PBGC determines its annuity interest factors and its lump sum interest factors. The PBGC specifically stated that it would not take a position on the question of what would be an appropriate permanent replacement for the 30-Year Treasury rate as the interest rate used to determine the funded status of a defined benefit plan.
The PBGC develops and uses two interest factors – an annuity factor and a lump sum factor. The factors are developed with the aim of duplicating annuity pricing by commercial annuity providers. The PBGC noted that these are not single interest “rates,” but interest “factors” developed based on several market elements.
The PBGC develops two interest factors for valuing annuity benefits – select and ultimate. These factors were first developed in 1993. Prior to 1993, the PBGC used the same factors to value annuity benefits and lump sum benefits. The annuity factors are used to value liabilities used for asset allocation in plans trusteed by the PBGC, to value PBGC claims in bankruptcy against employers, for certain calculations in mergers and spinoffs, and for employer reporting of plan underfunding to the PBGC under ERISA 4010. When computing the present value of an annuity benefit, the “select” factor is applied first to the number of years in the “select period” of the annuity benefit and the “ultimate” factor is used for all remaining years of the annuity benefit.
The length of the “select” period varies with the annuity being valued, in order to closely approximate commercial annuity pricing. According to the PBGC, at least two commercial annuity companies use a structure similar to the “select” and “ultimate” structure to set prices for annuity contracts.
When determining the annuity interest factors, the PBGC begins with the ACLI survey of annuity companies active in the group annuity closeout business. Sample prices for immediate and deferred annuities at seven ages are selected, and the sample prices are averaged. The PBGC calculates prices using the 83 GAM mortality table and various interest factor combinations. The PBGC then compares its calculated prices with the survey average prices and selects the factors that create the “best fit” to approximate market interest rates. The PBGC recalibrates the annuity interest factors each January. In addition, the select factor is adjusted during the year to reflect changes in yields of Moody’s Aa and A rated long-term corporate bonds.
Summary of Testimony of Kenneth Porter
Kenneth Porter is the Director of Global Benefits and Financial Planning at DuPont. He began his testimony on behalf of the ERISA Industry Committee (ERIC) by noting that “the role of government in retirement policy and funding is first and foremost to articulate a cogent long term retirement income policy, against which all contingency demands are applied.” Two concepts under gird that policy: (1) reasonable long-term funding, and (2) a uniform set of rules for all plans.
Mr. Porter said that the history of the current minimum funding rules shows they were established to address problems with plans that “were either habitually under funded or had become significantly under funded,” but that the rules applied to all plans. ERIC’s interest in funding is strong because 95% of its members sponsor a defined benefit plan. In Mr. Porter’s words: “if we have one message that we would pass on today, …that is that as we're debating the urgency around the 30 year bond, that we not confuse that with the long term funding, which is a whole other issue, and perhaps another issue for discussion. And even the broader issue of rethinking what a long term pension policy is for this nation, and making sure that we test everything we do against that policy.”
Mr. Porter explained that the uncertainty over the replacement of the 30-year rate creates valuation problems for the analysts and bond rating agencies that follow companies with defined benefit plans. Financial planning requires projections over four-to-five years and companies currently are unable to make pension projections for that time period. Furthermore, companies that currently are able to make DB plan contributions but are not required to want to factor their future funding obligations into their decision making.
The original rationale for the deficit reduction contribution was that at some level the plan faces “an immediate and impending liquidity crisis…” And, 30-year Treasuries were used to set a discount rate because of concern with corporate bonds. But, in 1998 a variety of factors, including the government’s repurchase of 30-year bonds, caused interest rates on those bonds to start declining even though that did not happen in the broader bond market.
Interest rates on 30-years subsequently were affected by the decision to stop issuing them and additional repurchases. These actions show that the 30-year bonds are not free of manipulation even though the manipulation was not deliberate. As a result, the defined benefit plan discount rate “has to be divorced of any government bond, because the government needs the right to manage its fiscal and monetary policy, without worrying about whether it negatively impacts pension funding, or the viability of pension plans in the long term.” Instead, Mr. Porter argued that the rate should be tied to corporate bonds, for which he has not heard any explanation of how those bonds could be manipulated. Though ERIC is not concerned about which index is used, it favors use of a “corporate bond index that's published by an independent company, with some monitoring by the government to make sure that that's doing its job.”
In response to a question, Mr. Porter expressed concern about trying to use a rate based on annuity contract pricing. One problem is the small size of the annuities market. Furthermore, the profit motive of insurance companies may skew the rate. He also responded to a question by expressing concerns over the use of a yield curve. He stated that the concept needs to be “debated in the context of the federal policy around long term benefit security…” Three questions need to be asked about the yield curve. “One, we need to find out whether it makes sense. And two, if it makes sense, is it complete? And having determined whether it's complete, where does it fit within the rules?”
Mr. Porter argued that the appropriate term matching would be to look at the allocation of assets upon plan termination. In DuPont’s plan, “all of our unfunded current liability is with respect to people who have an average future service of 20 years, and the payout is on average 25 to 30 years from now. And what sense does it make from a long term policy perspective to say I need to fund 30 percent of that liability this year when it's not even payable for 20 years.”
In sum, he stated that: “It may well be that yield curve concept is meaningful, provides important information. The question before the Congress ought to be, and the Administration, is it important to provide that information, and complete information is what I would suggest, including cash flow mention, not just payout mention. And then where does it fit? Does it fit in disclosure? Does it fit in as a part of the regular funding, or is really part of deficit funding? As a replacement for the 30 year bond in the context of the way deficit funding works today, it doesn't make any sense.”
In response to questions, Mr. Porter stated that the asset allocation of the DuPont plan is: “about 60 so percent equity, 25 more traditional fixed income, and the remainder in private placement fixed income type accounting contracts with more private placement investments. Some of the equity is international equity, some of it's in the U.S.”
Summary of Testimony of Kenneth Steiner
Mr. Steiner is a Consulting Actuary with more than 30 years of pension plan consulting experience. He was appointed Resource Actuary for Watson Wyatt Worldwide in October of 2000, and is now at the firm's D.C. offices. He's a fellow of the Society of Actuaries, a fellow of the Conference of Consulting Actuaries, and a member of the American Academy of Actuaries. He joined Watson Wyatt in 1979, and holds an AB degree in mathematics and economics from the University of California at Davis. I'm delighted to have Mr. Steiner here from Watson Wyatt, but also representing the American Benefits Council, a group that we probably know better as ABC.
Mr. Steiner began by noting that he was testifying on behalf of the American Benefits Council (ABC). “The American Benefits Council is a public policy organization representing principally Fortune 500 companies, and other organizations that either sponsor directly or provide services to retirement and health plans covering more than 100 million Americans.” ABC is concerned about the decline in the number of DB plans to less than 33,000 in 2002.Mr. Steiner stated that the use of the 30-year Treasury bond rate to discount plan liabilities causes plan funding to appear worse than it actually is. He also argued that “the swing from the abundant pension funding levels of the 1990s to the present state of increasing deficit for many plans is due to, in significant measure, to the counterproductive pension funding rules adopted by Congress. Over the nearly 30 years since enactment of ERISA, Congress has alternated between strengthening the pension plan system and limiting the revenue loss from tax deductible pension contributions.” He specifically criticized the rules that “strongly encourage employers to keep their plans as near as possible to the minimum funding level instead of providing a healthy financial cushion above that level.”
While acknowledging the need for a long-term discussion of the funding rules, ABC believes a permanent and comprehensive discount rate decision needs to be made because plan sponsors must plan for the long term. Mr. Steiner explained that he had “examined the pension contributions of the 650 or so Fortune 1000 companies that sponsor defined benefit plans. For the three years from 1999 to 2001, total contributions to defined benefit plans from these companies were about $41 billion. By comparison, in 2002 alone, these companies contributed a total of $43.5 billion, or more than had been contributed for the prior three years combined, and about triple the total contributions made just the year before . . . . Based on certain assumptions that I made, I estimated total contributions by Fortune 1000 companies in 2003 would be about $83 billion, or double the total in 2002, and six times the amount contributed in 2001. Under current law, if unchanged, I estimate that the contributions in the aggregate for the next two years, 2004 and 2005, will total about $160 billion, or an average of $80 billion per year even assuming that plan assets earn 8 percent per annum after 2002.”
In order to prevent the need for such contributions, ABC supports the discount rate reform proposed in H.R.1776 – replacement of the 30-year Treasury with the rate of interest on conservative long term corporate bonds. In ABC’s view: “The use of a corporate bond rate blend steers a conservative middle course between the rates of return actually earned by pension plans and the annuity rates charged to insurers to terminate such plans.” This proposal has the following benefits: (1) it is “permanent and comprehensive, covering funding, premium and lump sum calculations:” (2) “it applies a consistent blend for these various pension calculations;” (3) “it uses a blend of stable long term corporate bond indices as the new and more rational benchmark for measuring liabilities;” and (4) it maintains existing pension rules such as those dictating interest rate averaging.”
Mr. Steiner objected to the use of a corporate bond yield curve, “with perhaps the most serious threshold problem [being] that a yield curve concept is just that, a concept, an idea, and one that is highly controversial at that.“ He questions how a yield curve might apply to lump-sums and other calculations as well as what type of transition might occur. Mr. Steiner stated that a yield curve would increase the volatility of liability measurement because not only would those measurements be dependent on interest rate changes but also upon “changes in the shape of the yield curve, and on changes in the duration of plan liabilities.”
In response to questions, Mr. Steiner discussed a Watson Wyatt study that showed: “Of the plans that have over 5,000 participants, about 77 percent of those companies have done nothing to those plans. About 15 percent have either frozen or significantly reduced benefits, and the remaining percentage have made changes in their total program that are relatively cost neutral.”
Summary of Testimony of Howard Kurpit
Howard Kurpit is a Vice President and Senior Actuary at MetLife. Mr. Kurpit is responsible for the retirement and savings annuities and stable value product area. He oversees all costing administration contracts, and product risk management. He's been with MetLife for 20 years, has served in various financial and business roles, including enterprise risk management, mergers and acquisitions, and various group insurance assignments. Mr. Kurpit is a fellow of the Society of Actuaries, and a member of the American Academy of Actuaries.
Mr. Kurpit began by explaining the basic concept of an annuity. He then discussed the importance of first payment date; plan type, and socio-economic factors. Next he turned to the assumptions that are made when annuities are priced. As a percentage of total prices, expenses are a small percentage of the total price – broadly speaking between half a percent and 2 percent. The three most important assumptions are investment return, mortality, and retirement age.
Investment return depends upon the basket of assets that backs the liabilities. One factor is duration – generally the average time when the payments come due. Asset optionality – such as bonds with call options – also affects return. Finally, the annuity issuer’s risk tolerance and capital are a factor.
Annuities may be priced using either a single rate or a yield curve. A single rate means using one rate to discount the cash flows. A yield curve is more theoretically accurate and is the most companies’ price. That methodology matches each of the set of expected future payments with the yield at the point the payment is due. In Mr. Kurpit’s words: “Yield curves are coupon based. You can convert them to spot rates, zero coupons, and then you use you know, you match each of the payments with that zero coupon, discount the whole thing back. And in theory, that's your cost.” Mr. Kurpit then compared use of a single rate for an immediate annuity and an annuity with a deferred beginning payment date. For deferred starting dates it becomes difficult to match durations.
Mortality also is important in annuity pricing. Insurance companies use 3 or 4 standard mortality tables that have been developed based on inter-company experience. There are both group and individual tables. Adjustments may be made to reflect factors such as collar color, DB versus DC plans, or plan size. These adjustments may be made based on company experience and/or literature. As with the investment factor, Mr. Kurpit discussed the sensitivity of mortality assumptions.
The third factor in pricing that Mr. Kurpit discussed in some detail was early retirement risk. One consideration is past plan experience because on average people retire earlier than normal retirement age. Plan reduction factors for early retirement also affect this calculation.
Finally Mr. Kurpit compared the effects of differences in actual results compared to assumptions for investment return, mortality and retirement date. Investment return is the one factor that could be managed throughout the period of the annuity.
In response to questions, Mr. Kurpit addressed the question of whether annuities would be available in the case of the termination of a very large plan and the rates at which such a plan might be priced. One possibility in such a situation would be for multiple companies to work together to provide the annuities. The pricing might be higher or lower than for a smaller plan depending on various risk factors.
Summary of Testimony of Shaun O’Brien
Shaun O'Brien is the Assistant Director of the AFL CIO's Public Policy Department. He previously served as the Federation Senior Policy Analyst for retirement income issues. In addition to his continued work in Social Security and Pension Policy, Shaun participates in the development and implementation of AFL CIO policies on health care, labor standards, unemployment insurance, worker training, and working women. Shaun received a BA degree summa cum laude from the American University, and a JD from Cornell Law School.
Mr. O’Brien began by discussing the importance of DB plans to the labor movement. In the private sector approximately 70% of AFL-CIO members are DB plan participants. That compares to approximately 1 in 7 of the non-union workers in the private sector. The AFL-CIO supported an approach similar to the current temporary fix, which permits use of up to 120% of the 30-year Treasury rates. Since then their position has evolved so that they currently support enactment of a permanent replacement rate. Mr. O’Brien spoke about the need for companies to make projections for up to approximately 8 years in advance. The larger discussion about the funding rules should not displace the need for permanent reform on the discount rate.
The AFL-CIO approached the discount rate issue by evaluating the Congressional intent in adopting the 30-year rate, which they believe was intended to act as a proxy for purchase annuity rates. They believe a similar approach continues to be important in order to provide benefit security. The problem is that there is not a great deal of clarity on how to achieve that. After considerable debate and openness to various approaches, they have decided that “as an upper bound of what is acceptable, we could live with a well defined corporate bond rate with some possible modifications.” Specifically, they prefer the ERISA Industry Committee approach to the Portman – Cardin proposal, which they feel does not adequately define the composition of the rate determination. For example, the AFL-CIO would prefer to see the duration and the quality levels more specifically defined. They also would prefer use of multiple indices.
The AFL-CIO opposes the use of a yield curve to establish the discount rate. Mr. O’Brien expressed concern with the conceptual nature of the yield curve proposal. Another negative factor is the potential complexity that would be introduced into the rate setting process. Furthermore they are concerned with the mark-to-marked approach that is an implicit part of a yield curve approach.
The AFL-CIO believes that an in-depth review of the funding rules is warranted. One serious concern is the volatility of the funding requirements. Another is the use of mortality assumptions in the measurement of liability. They support the voluntary ability of companies to use collar adjustment factors to mortality tables and this becomes even more important if a yield curve is used for the discount rate.
Summary of Testimony of Adrien R. LaBombarde
Adrien LeBombarde is a principal and a consulting actuary and the Houston office of Milliman USA. He joined the firm in 1986 to help launch Milliman's Employee Benefits Research Group in D.C. He has been in this field of employee benefits and analysis, and research of pensions for more than 20 years. One of Mr. LaBombarde’s projects was helping to design the model that was used to develop the 1987 pension funding regulations, so Mr. LaBombarde also is able to talk to us about the history of what we have, and why we have it, and then place it in some context.
Mr. LaBombarde began by stating that though he was testifying with Milliman’s permission, his testimony would be in a capacity where any views, or comments, or recommendations, or anything expressed at the meeting does not represent an official position of Milliman USA, nor of any association that he has been associated with.
Mr. LaBombarde then set the danger to DB plan sponsorship in context. As he began in the field in 1976, the first year ERISA was effective, DB plans were on the decline. Next the gender discrimination cases were “supposed to be the last nail in the coffin of the defined benefit plan. And I've been in this profession now over 25 years, and every year I'm hearing about the new last nail in the coffin…. We are at a crisis. It may not be the last nail in the coffin, but we are facing something here that I, in my entire career, have never seen the likes of before.”
To illustrate the danger to DB plans, Mr. LaBombarde explained that every week his work involves “plan freezes, plan cutbacks and plan terminations. …. I'd go so far as to say that if something isn't done and done quickly, and if there were to be a snap back, you would see terminations of defined benefit plans like we've never seen before since ERISA.” Although relief is need, in his view funding rules need to be flexible and risk to the PBGC and participants needs to be part of the balance.
Mr. LaBombarde put the interest rate problem in perspective by saying that “an 11,000 Dow with 75 basis point decrease in the interest rates, an 11,000 Dow would just barely begin to start making up for what we've lost this year in terms of what's happened to because of what's happened to the interest rates.” And, as interest rates continue to drop, even moving to a corporate bond rate might not provide significant relief to plan sponsors. Similarly, if a yield curve is used, the 30-year Treasury rate might not be very different from an annuitization rate, particularly for mature plans.
From a volatility standpoint, Mr. LaBombarde commented on the situation where plans go from being prevented from making contributions to extremely high deficit reduction contributions (DRC) in the space of just a few years. His view from working on the original DRC legislation was that “it was primarily intended for dealing with corporate decisions to increase benefits even though the plan was not sufficiently funded. . . . We were not looking at a Black Monday and the fall of interest rates to 40 year lows. And it was this interest rate risk that the deficit reduction contribution was not designed to deal with.
As for recommendations, Mr. LaBombarde said: “You cannot have the snap back. You've got to have either an extension or permanent replacement. I would certainly reiterate what many others have said, that a permanent replacement is to be preferred, but if the timing is such that a permanent replacement cannot be arrived at shortly, and I mean very, very soon, then at the very least, a temporary extension should be put in place.” He also would like to see funding standards reform.
In 1986 and 1987 Mr. LaBombarde worked with the PBGC to establish the DRC as being on a plan termination basis. Other alternatives were considered, but it appeared to be the best policy at the time in spite of the volatility it creates. Throughout the rest of his testimony he assumed plan termination would remain the basis for DRC because that seems to be a given in the current debate.
One way to look at interest rate policy is that “the interest rate should represent the maximum permissible funding risk level. . . . If I were a plan sponsor and I could match, do a dedicated bond portfolio where every single payment that's coming out is matched by a payment from the bond portfolio, and therefore, do the interest rate on that.” But, this standard becomes too high when fiduciary obligations are considered. At the other end of the spectrum, the interest rate could be set to match Treasury securities. Instead, Mr. LaBombarde argued that the goal should be “something in between, something that represents the maximum permissible risk that the government feels is necessary to take for funding the benefit sponsors. And that that is something above the Treasury security rates, something below the junk bond rate, and that the annuitization rate, the settlement rate, is a fair basis.”
One point on which Mr. LaBombarde differs with many people is in the use of the 4-year averaging. He argues that the interest rate should represent current conditions. At best, smoothing should occur after the calculations are made, not as part of the interest rate calculations. A transition period, however, would be necessary to avoid the equivalent of a “mini snap back.”
Mr. LaBombarde does support “a reflection of the maturity of actuarial liability. … [U]sing a 30 year corporate bond rate is simply not adequate to represent a snapshot of the liabilities for something where the average maturity is in some cases less than 10 years.” Though both complexity and cliffs are concerns, both can be dealt with. For example, a different interest rate might be established for retiree liabilities as compared to non-retiree liabilities. Or, the PBGC model of multiple rates could be used. There are ways of dealing with the complexity and the cliffs. Mr. LaBombarde does believe that all relevant interest rates, including PBGC rates, should be consistent. This will help decrease complexity. And, the question of properly evaluating plan termination risk (the credit worthiness of the plan sponsor) must be examined.
In response to questions, Mr. LaBombarde indicated he was uncomfortable with using a nongovernmental index to establish the discount rate. If outside indices were used, he suggests use of a panel of government agencies to set the rate.
In response to questions on funding parameters, Mr. LaBombarde estimated that, if a corporate bond basis were used, that an appropriate funding target might be 125 to 130 percent. He strongly opposes the 150 percent level because it did not consider salary levels.
Summary of Testimony of Kenneth A. Kent
Kenneth Kent is a principal with Mercer Human Resource Consulting, one of the major providers of consulting services for employee benefits in the United States. He's a consulting actuary with over 27 years of experience serving major companies, public employers, and Multiemployer funds. He is a fellow in the Conference of Consulting Actuaries, the Society of Actuaries, and an enrolled actuary and a member in the American Academy of Actuaries. Ken is currently the chair of the Joint Committee on the Code of Professional Conduct, a member of both the Council on Professionalism and the Pension Practice Council of the American Academy of Actuaries. He's a past president of the Conference of the Consulting Actuaries, and is slated to be the next vice president of the Pension Practice Council for the academy beginning this fall.
Mr. Kent began by explaining that the American Academy of Actuaries is a non-partisan policy organization that serves the public by providing unbiased review and analysis of issues affecting financial security systems. He stated that his testimony would reflect views that are partly those of the Pension Practice Council, the senior pension fellow, and his own.
Mr. Kent identified the problem as being one of a haphazard set of rules set up to deal with various issues that cropped up at various times “from revenue generation to abuses to creating solvency rules. The 30-year Treasury rate benchmark fails to provide the type of proxy for what it was intended because of the economic conditions, low interest rates, and the cessation of issuing of those bonds. And that proxy was to define a benchmark for annuitization of benefits and defined benefit programs.” He focused his testimony on three issues: solvency, funding, and accounting.
The AAA’s position is that solvency correction should be more gradual than currently required by the combination of the 30-year bond rate and the deficit reduction contribution (DRC). The AAA supports use of a long-term high-grade corporate bond rate for a minimum of two years, preferably at least five. Fixing a standard for a significant term is important to allow necessary business planning. The AAA’s concern with a bond yield curve relate to the unknown nature of such a curve’s performance in a variety of economic conditions such as an inverted yield curve. Mr. Kent also stated apprehension that a yield curve could raise issues of precision as related to mortality assumptions and complexity.
The AAA is concerned about the issues that funding and solvency raise for the long term health of defined benefit plans. The view is that employers are freezing plans until economic conditions permit termination of those plans. A lack of relief will encourage more employers to freeze their plans.
The AAA’s proposal for solvency measures is to look at solvency in terms of the source, and to define a remedy based on that source. It identified three sources of solvency problems: an economic source, a contribution policy source, and an investment risk source. Remedies for solvency problems should depend upon the source of the problem.
Mr. Kent pointed out that the funding rules are complex and provide 11 different ways to amortize a new liability under a plan, based on the source of the liability. They also result in extreme volatility in contributions. In place of this system he suggested a flexible approach undergirded by a long-term philosophy. Specific ideas included the following: “Faster amortization of benefit changes, so that there's not a mismatch with regard to the timing of earning those benefits versus paying for the liabilities that stand behind them. Slower amortization of gains and losses, so that we can smooth out some of the volatilities, particularly in market conditions like the ones we've been experiencing over the past three years. Raising the 404 limits, the maximum allowable deductible limits so that employers can, in fact, fund to a certain surplus level. And provide more rules that say you can fund to a surplus level, and if in fact your fund grows to a much higher level than that, potentially allowing for reversion back of those assets to the employer without the significant punitive tax, excise tax and corporate tax, which means that money that gets reverted back to a company is 10 cents on the dollar.”
From an accounting perspective, Mr. Kent stated that “the assumptions are appropriate to reflect as much detail as possible to be able to benchmark the liabilities and assets on a market value basis. . . . Accounting is where the transparency discussion belongs in terms of the assets and liabilities relative to funding, where funding methods, asset valuation methods, may still be appropriate in order to manage volatility in long-term funding.”
In response to questions Mr. Kent stated that the criteria to be used in selecting indices going into a corporate bond benchmark should be breadth, track record, history, and the organization that publishes the indices. The preference for a long-term corporate bond market is due to empirical information comparing those rates to the Treasury rate.
Summary of Testimony of Christian Weller
Dr. Christian Weller holds a PhD in Economics, from the University of Massachusetts at Amherst. He has been on the research staff at the Economic Policy Institute since 1999, specializing in Social Security, retirement income, macroeconomics, the Federal Reserve and international finance. He is the author, or co-author, of numerous reports on Social Security, retirement issues. He's been the author of several articles in popular and academic publications, including the Journal of Policy Analysis and Management.
Dr. Weller based his testimony on a paper that he co-authored with Dean Baker from the Center for Economic and Policy Research in Washington. Defined benefit plans are, from our perspective, an important insurance benefit amid increasingly insecure retirement savings. In their view, “any proposal to change pension funding rules should meet two tests. First, it should at least maintain the security of pension benefits. And, second, any changes should promote and sustain sponsorship of defined benefit plans.”
Because defined benefit plans pay benefits typically pay benefits to individuals over a 15-20 year period, the funding rules should ensure that, under reasonable assumptions, plan sponsors will be able to meet benefit obligations for the duration of the plan. The level of certainty that plan sponsors have in their ability to meet the plan’s obligations affects willingness to sponsor plans.
Dr. Weller stated that short term funding relief is necessary. Also, “in the medium term, it is important to make interest plans -- interest rates less volatile to -- make plan funding rules less volatile to maintain sponsorship.” He challenged the perfect storm analogy because “the combination of declining interest rates, falling asset prices and low earnings typically occurs during most recessions.”
Current funding rules actually create a counter-cyclical funding burden by requiring more contributions during a recession than during other times. Less counter-cyclical rules would make it less likely that employers would have to make cash contributions when the economy is weak, and more likely that employers will contribute when the economy is strong and business is flush.
Dr Weller stated that moving to the proposed corporate bond rate reduce liabilities by six to eight. According to estimates from Watson Wyatt, contribution obligations for Fortune 1000 companies would decline over the next two years from $160 billion to $45 billion. He testified, though that the yield curve would significantly reduce the smoothing of interest rates, increasing the volatility of the interest rate assumption to more than 20 percent. The requirement that a range of interest rates be used would make future contribution requirements more unpredictable.
Dr. Weller’s paper discussed three alternatives that would make contributions less volatile and less likely to rise during recession. The first possibility is to smooth the interest rate over a 20-year period. The second is to smooth liabilities over an equivalent period. The third is to require contributions up to 120 percent of liabilities. Their results show that using a smoother interest rate assumption to reduce the volatility of contributions could reduce the required contributions during recessions and increase them during them during good times while also improving the overall funding status of plans. Similarly, the asset smoothing would also increase plan funding while potentially reducing the average contribution, especially during recessions. Finally, the long -term average of the 30-year Treasury is still higher than the four-year weighted average, even 120 percent of the four-year weighted average of the 30-year Treasury. As a result, movement to such an average currently would provide funding relief.
In response to questions, Dr. Weller state that if plans shift to a different portfolio mix as a result of a yield curve that would have tremendous implications for capital markets.
Summary of Testimony of Judith F. Mazo
Ms. Mazo is Senior Vice President and Director of Research for The Segal Company. She has responsibility for directing research and providing guidance on public policy, legislative and regulatory issues, and other matters of interest to clients of their national actuarial benefits, and compensation consulting firm clients. Before joining The Segal Company, Ms. Mazo was engaged in private law practice in Washington, D.C. specializing in ERISA, and serving as special counsel to the U.S. Pension Benefit Guaranty Corporation, and as a consultant to the pension task force of the Committee on Education and Labor of the U.S. House of Representatives. She was senior attorney for the PBGC, and executive assistant to its general counsel from 1975 to 1979. Ms. Mazo graduated with honors from Yale Law School and Wellesley College, and has been admitted to the bar in the District of Columbia and the State of Louisiana.
Ms. Mazo prefaced her testimony by stating that “When I talk about multiemployer issues, I will be speaking on behalf of the NCCMP. When I speak about the issues generally, I'm sort of speaking on behalf of the Segal Company, which does have Multiemployer and single-employer clients in the public sector as well. But I'm mainly speaking on behalf of myself. And to the extent the opinions are controversial, I'll either say, "This is just me," or I may forget to say it, but my company isn't to be charged with it.”
In approaching the issues associated with defined benefit plan funding, Ms. Mazo encouraged the working group to consider the broader expectations and regulation of those plans. In her view, we need to decide whether “we really sincerely want to promote defined benefit plans, keep them going as an adjunct to our social safety net, or do we want to lay them gently to rest.” One view would be that “they're here now, promises have been made to people, those promises must be kept, but we need to develop a system where people don't rely on defined benefit plans anymore.” In contrast, though Ms. Mazo said that “I think that I personally believe -- and my company believes,. . . -- that defined benefit plans should have a future. The aging of the population should lead to their having a future . . .The one thing we have to do if we want to keep defined benefit plans alive is not to eliminate the features that make them appealing to employers and to employees. So we can't make it too expensive, for example, to offer past service benefits …And we can't make the benefits from the employer side, we can't make the way that we run the plans, and that they're allowed to plan, too rigid. We cannot, I submit, protect every expectation, and turn every hope into an entitlement on the part of the employees if the defined benefit plans are going to meet what I think should be their primary appeal to employers, which is their flexibility, their plastic nature, that they can be shaped to meet a given workforce need at a given time, benefits can be added, [and] benefits can be, in my view, time-limited . . .Employers need to be in a position to both provide the benefits that they feel their business needs, and to fund them without, as we said, driving the business into the ground.”
In terms of the equity markets, Ms. Mazo made the point that plan typology affects the U.S. capital markets. In her words: “[T]he venture capital market is going to be finding itself very short of capital if defined benefit plans wane and 401(k)s take over because it's not an appropriate investment for 401(k) plans. Or I would say it's a decreasingly appropriate investment for any plan that's focused on short-term payouts to highly mobile workers.“ She also discussed the move over time from totally secure funding of defined benefit plans in the 30’s and ‘40s through annuities to the current question of whether a yield curve approach would force or encourage plans to go to dedicated portfolios. In her view, the move “from this very, very secure approach to a lower level of security, . . . has opened the door to investment opportunities, . . . has enabled plans to promise and pay for bigger benefits, and enable[d] there to be more plans around. And not coincidentally, has introduced several trillions of dollars into a much broader realm of the capital markets.”
In response to questions, Ms. Mazo said that multiemployer plans, on average, still tended to be well funded as of January 1, 2001. She commented, “Multiemployer plans are typically much more conservatively funded, conservative in two ways. One is interest assumptions. The general interest rate assumption for Multiemployer plans for any number of years has ranged between seven and eight percent, and probably the bulk would be around seven and one-half percent assumption. For single-employer plans, it's been more in the seven and one-half, to eight and one-half, to nine percent. And that is because the investment policies have also been more conservative in general in the Multiemployer arena.. . Just as an illustration, . . .[o]ur investment consulting subsidiary did a report on the investment experience of its Multiemployer pension plans on 100 plans or something like that . . . the benchmark that they used to measure the plans against was a 55 percent equity/45 percent fixed benchmark. And all the studies you see with benchmarks for corporate plans are 60/40. . . .[T]he Multiemployer system might be something of a model, a little bit, for what would be ways to deal with the single-employer crisis. One thing that's clear, the Multiemployer plans are not in crisis.”
Summary of Testimony of Duane E. Woerth
Captain Duane E. Woerth is a Northwest Airlines pilot with extensive experience in the field of international aviation. He is currently serving his second four-year term as president of the Airline Pilots Association. He was unanimously re-elected by that association's board of directors on October 23, 2002. Captain Woerth was appointed by the Department of Transportation to lead the aircraft security rapid response team immediately following the terrorist attacks of September 11, 2001. Captain Woerth serves currently as the vice president of the AFL-CIO. He's a B-747 captain. He's flown at Northwest for 20 years, and Braniff Airlines for five. Captain Woerth holds a BS degree from the University of Nebraska, and a Master's degree from the University of Oklahoma.
Captain Woerth began by stating that the current funding rules were “designed to protect workers' pensions” but that it is important that the rules do not cause termination of the “very plans that the law was designed to protect.” He emphasized, though, the unique circumstances of the airline industry. In his words: “We have had unbelievable losses, not due to a chronic problem in the airline industry that has persisted for 34 years. We're a cyclical business. But specifically related to terrorism, and to what's happened in the last 20 months, [that is what] has made the ability to have these [deficit reduction contributions] repaid right away almost an impossible task.”
ALPA recommends a three-part approach to the funding issues, which is intended “to enable airlines to maintain their employees' plans, protect workers' retirement benefits, and ensure the viability of the U.S. passenger airlines.” First, ALPA supports a permanent or long term use of a composite corporate bond rate based on three or more corporate bond indices. It believes that a corporate bond yield curve would be too volatile. And they seek a long transition period if the same bond rate is to be used to calculate lump sum payments. This is particularly important, in ALPA’s view, because pilots must retire at age 60.
Second, ALPA recommends “approval of a special temporary funding rule for certain defined benefit plans maintained by passenger airlines.” Representative David Camp introduced this legislation as the Airline Pension Act of 2003, HR 2719. The basic terms of the legislation call for a five-year moratorium on the deficit reduction contribution. Unfunded liability would then be amortized over a 20-year period. Payments would be interest only for the first five years and level principal and interest payments for the last 15.
Third, ALPA recommends “strengthening funding rules for defined benefit plans by permitting employers to make larger contributions to plans when they are able to afford them.” One approach would be to allow plans to project cost-of-living increases when calculating funding obligations. In addition, ALPA advocates employers being able to make deductible contributions to a plan until a plan's assets equal the present value of all future benefits, or 130 percent of current liability. In response to questions, David Vance, Director of the Retirement Insurance Department, stated that ALPA would favor a requirement that employers continue to contribute to plans at least to some level beyond full funding.
Captain Woerth noted the importance of traditional defined benefit plans in the airline industry, which has both a seniority system, and a record of long-term employment. He emphasized the difference between the airline industry, which is not a declining industry, and the steel industry.
In response to questions, Mr. Parrack, an actuary at ALPA, clarified that the proposed legislation to freeze PBGC obligations would not affect the way a terminated plans assets would be allocated other than that it would not account for benefits accrued after the effective date in the legislation.
Summary of Testimony of Peter M. Kelly, II
Peter M. Kelly is a shareholder at Ogletree Deakins where his practice is devoted to the representation of employers and their employee benefit plan. He is experienced with many facets of plan operation, drafting, design, including the resolution of disputes through ERISA claims procedures, or in litigation. He represents employers and their plans before all government agencies and the courts with jurisdictions under ERISA, or the federal courts. Mr. Kelly has testified in front of Congress more than two dozen times. He has his JD from the Indiana University School of Law, and an undergraduate degree from the University of Notre Dame. He is here today on behalf of the U.S. Chamber of Commerce, and I'll turn the floor over to you.
Mr. Kelly testified that: “The most pressing issue that's facing defined benefit plans today, in terms of funding at least, is to replace the 30-year Treasury bond interest rate.” He began by pointing out that the DB plan system has a strong history of funding and the current situation seems to be unique. He pointed out that many companies are fulfilling their deficit funding obligations and taking other extreme steps to fund their plans.
Mr. Kelly advocated permanent interest rate reform and the selection of a long-term corporate bond rate. He argued that immunizing a pension portfolio through bond funds might be a breach of fiduciary duty by plan fiduciaries. He articulated the view that large numbers of plan participants with diverse characteristics would make it complex to use a durational yield curve. He also stated that yield curve calculations would require plans to “produce data in ways that they haven't produced them before…. Well that is an enormous undertaking. If anyone in this room has ever had the experience of watching a plan terminate, you've seen what goes on with the so-called ERISA 4044 allocation. It is an enormous and expensive undertaking, which, among other things, the Administration's proposal would require on a regular basis. That is something -- it's getting hit by a truck, as far as the cost of plan administration.”
Mr. Kelly argued that “the financial community has plenty of information about the funded status of plans.” Considerable information is available from the Form 5500s. In response to questions on the timeliness of Form 5500 data, Mr. Kelly responded that summary annual report data is timelier even though it has more limited information about funding. He also indicated that it would be quite difficult for plans to provide participants with individualized data on what their benefits would be if the PBGC were to take over the plan.
The Chamber does support the voluntary ability of plan sponsors to contribute in excess of the current full funding limits to plans though they would not require such contributions. Mr. Kelly believed that employers should receive tax deductions for contributions in excess of what is currently allowed. In contrast, the Chamber does not support direct limitations on a plan’s ability to grant accruals to plan participants during times when the employer is in financial difficulty.
Mr. Kelly expressed some degree of personal sympathy with the plight of the airlines both because they were not irresponsible in not contributing to plans during years when they were prevented by the existing legal standards from contributing and because of the sudden financial downturn which seems inconsistent with their long term underlying fiscal health.
Summary of Testimony of Steve Berkley
Steven Berkley is the Managing Director in the research department of Lehman Brothers fixed income division, where he manages the development of the index business. His responsibilities include building new index products, marketing the Lehman family of indices, directing index production and publication processes and supporting Lehman's proprietary software, pc products in point, in the investment community. Since 1997, Mr. Berkley's index group was elected to institutional investors first team for bond market indices. Mr. Berkley joined Lehman Brothers in 1986, and had previously worked at CitiCorp investment bank for five years, as a consultant, developing a comprehensive trading system. He holds an MBA degree and a Bachelors of Science degree in computer science from Hofstra. Mr. Berkley graduated summa cum laude, and was elected to Phi Beta Kappa.
Mr. Berkley began by providing background on the Lehman Brothers bond indices, which have “a 90 percent share of investors who are using benchmarks.” He indicated that analytics, commitment to the business and integrity of unbiased indices are important characteristics that differentiate indices. People tend to use fixed income indices to measure the success of portfolio managers.
According to Mr. Berkley: “Philosophically, there's two ways of building a fixed income index. The first is what we call a portfolio-based, or basket, index. And, with these kinds of approaches, the index provider typically will announce and select which bonds go into the index. These indices can work, and they can be representative of what's happening in the marketplace, but there's some inherent problems with baskets.”
He continued: “First of all, they're subjective and not objective. Secondly, there's a potential for bias in the selection of a basket. How are the bonds selected to go into the basket? Is it because the index provider wants to sell some securities or buy some securities, or brought the deal to the marketplace? And, probably, most of importantly, you have the problem of event risk. With a basket of securities, maybe 100 bonds, you may have a problem if one of the bonds has a problem, because it would be over-weighted in the basket, as opposed to the natural weights in the entire market. So, that's the problem with what we call portfolio baskets.
“What we try to do is build what we call rules-based indices. And with a rules-based index, we work with the investment community to come up with a series of constraints that, collectively, we feel are representative of the marketplace. And so the idea is that once you publish the constraints, any of the bonds that come to market may or may not make the index, but it will be decided based upon whether they meet the rules, not by some subjective decision that a committee is making. All right, and so these indices are a little bit tougher to construct, but they are ultimately fairer. And they're difficult to construct because you have to keep track of all of the securities that get issued in the marketplace, they need to be priced appropriately, you need to keep track of corporate events that may occur: upgrades, downgrades. So, it's a broader universe. Just to give you a feel, our credit index contains approximately 4,000 securities, so that's a lot of work that has to go on a regular basis. But, by the same token, having an index that's broad like that ensures that you aren't having any particular issue being over-represented in the market -- in the bench market, I should say.”
In response to questions, Mr. Berkley noted that about $1.5 – 2 trillion in assets are managed against the broadest Lehman index, the U.S. aggregate index, or some of the sub-components.
The rules for the index is that securities must have at least a year to maturity, be investment grade or higher., and have at least 150 par amount outstanding. In addition, there are currency constraints and sector constraints. Mr. Berkley’s detailed testimony outlined some of the sub-indices. He explained that the rules do change over time. Lehman Brothers calculates both a performance measure, for which the securities outstanding stay static for a month at a time, and a statistics universe, which is a projection for the following month’s index.
Mr. Berkley stated that, with respect to an appropriate replacement for the 30-year treasury rate, “My personal view is that I think, if you put together an unbiased benchmark that had broad representation in the marketplace, that's an appropriate measure of the fixed-income markets, which measures the interest rates and things of that nature….Why not all investment grade securities? Why not include credit securities, as opposed to just corporate bonds? . . . I think if you look at a well-established index, which has a track record of 30 years, or so, and that's been used by investors all over the country, something such as what we call the Long Government Credit Index, which would include all U.S. Treasuries, all U.S. agencies and all U.S. credit securities with 10 years of maturity and greater. That is a very broad benchmark, and had a mix of assets, it has a mix of qualities and if, for some reason, people are uncomfortable with single A's and AA's, which I still would like to understand why, but we can create a Long Government Credit Index that is AA and higher. So, I did a little bit of homework on that one as well. It's not in your papers. But if you looked at the Long Government Credit Index over the last 14 years, or so, the yield on that has been higher than the 30-year bellwether for the entire period of time.”
In response to questions, Mr. Berkley explained that Lehman Brothers currently uses Moody’s as the primary source for rating bonds but, as of October 1, 2003, will be using the most conservative rating from either Moody's or S&P. He said that the long AAA credit index contains 50 securities with $26 billion, and the long AA is 152 securities for $70 billion. Those include bonds other than those issued by corporations. Looking only at corporate bonds, the bonds of a few companies make up a very substantial part of the baskets. In fact, there is about a 75% weight in financial institutions.
Summary of Testimony of Jeremy Gold
Dr. Jeremy Gold provides pension finance consulting to sponsors of defined benefit pension plans. His consulting focuses on two areas: investment analysis from an asset liability point of view, and strategic benefit advice from a corporate finance perspective. Prior to forming his own firm in 1989, Dr. Gold headed Morgan Stanley pensions, with responsibility for developing and marketing Morgan Stanley products and services to the pension community.
From '79 to '85, he was a consulting actuary/account executive at Abbot Consultants. Dr. Gold is frequently quoted in benefit investment periodicals and is a frequent speaker at benefit and investment conferences. He has testified before Congress, and FASB on the subject of post-employment medical benefits. Dr. Gold is a fellow with the Society of Actuaries, and received his PhD from the Wharton School.
Dr. Gold began by stating that his testimony would deal with the endpoint of an appropriate discount rate to determine the current liability for defined benefit plans. In his words: “pension plans are promises made by employers to employees, we have collectively concluded that promises made must become promises kept.”
Dr. Gold agreed that the Administration’s proposal for a yield curve based on corporate bond rates would “be more transparent and more plan and date sensitive…” However, he testified, “the use of corporate bond rates, rather than Treasury bond rates, guarantees us that the standard will be weaker than it must be.”
Dr. Gold believes that “Full funding at all times, within practical limits, should be the end-point of the process we now begin.” He provided documents that further address the use of a Treasury yield curve, the importance of solvency, and the PBGC’s effective guaranty of loans to financially weak companies.
In response to questions, Dr. Gold stated that he is a supporter of defined benefit plans but that sponsorship of those plans have not been effectively encouraged during the past 20 years. At the same time, he argued that once defined benefit plans recover from the current economic conditions it is important that the same situation not be allowed to occur in the future. Instead, he advocated incentives to encourage prudence by plan sponsors. In his view, asset-liability mismanagement is the source of the current funding problems.
In response to questions about a yield curve, Dr. Gold argued that progress in financial markets has resulted in consideration of the term structure of commitments. In his words, “There is no trader on Wall Street who would not, when faced with a cash flow matching problem, would look to anything but a matching portfolio, which implicitly contains all of the aspects that we abbreviate when we say yield curve.” He speculated that if pension plans do mark to market, that may result in a flatter yield curve.
Dr. Gold responded to a question on the role of equities in a plan investment portfolio by stating that the level of risk should affect PBGC premiums. Earlier he had explained that equities were an inappropriate mechanism to ensure that a pension plan could pay promised benefits. Furthermore, “When corporate pension plans invest in bonds, rather than equities, they increase shareholder wealth. It's true that they increase the expected contributions to be made, but after fully pricing in the risk and the tax effects, they are destroying value by investing what amounts to shareholders in equities, and the shareholders can invest in equities themselves.”
Finally, in response to a question about the role of the PBGC in a system where all defined benefit plans were fully funded, Dr. Gold stated, “in my ideal world, PBGC would be effectively vestigial. Its role would be to deal with the fact that something happens, and that thing happens regardless of how prudent we are.”
Summary of Testimony of Ronald Ryan
Ronald Ryan is the founder and the President of Ryan Labs, which manages over three billion dollars in assets. Previously, Mr. Ryan headed the Ryan Financial Strategy Group, which created the first daily bond index in the United States, the Treasury yield curve, which is syndicated throughout the world. Mr. Ryan built Ryan Labs as an asset management and research firm, specializing in custom index funds since 1988. He's well known for his innovative work on fixed income indexes and research, especially asset-liability management. Mr. Ryan has worked with bonds since at least 1966, as I went back through his work in bond and in indices since 1973. He holds the Chartered Financial Analyst designation and has both an MBA and a DBA from Loyola University.
Mr. Ryan began by testifying that Ryan Labs “believe[s] there is a pension crisis in America, that threatens the solvency and financial integrity of our corporations, our cities, our states and even the federal government.” He identified the following four problems that result from the funding deficit: “First is earnings drag. Second is higher contributions. Third is higher variable PBGC premiums. And fourth is lower funding status.”
Mr. Ryan stated that “Pension assets have, on average, under-performed pension liabilities by -67.83 percent over the last three calendar years. … The reason for such askew-ness to equities lies within accounting and actuarial rules of practices that mislead pension funds into inappropriate asset allocation decisions.”
Asset and liability amortizations create earnings drag. According to Mr. Ryan, “If earnings are $1 billion, with pension assets at $7 billion and pension liabilities as $10 billion, for a 30 percent deficit, the last three calendar years asset allocation and discount rate pricing, or mis-pricing, would cause a $393 million earnings drag each year for the next 12 years, equal to a 39.3 percent reduction of last years earnings of $1 billion.”
Regarding contributions, Mr. Ryan stated that the current statutory discount rate does not represent market yield. This makes it impossible to effectively manage the assets of a defined benefit plan. Instead, Mr. Ryan recommends, “Liability should be priced at the market as a yield curve. A rule should be created, or enforced, that reads: If you cannot buy it, you cannot use it as a discount rate.” Because of issues of purchasability with long-term high-grade corporate bonds, Mr. Ryan advocated use of a Treasury zero-coupon yield curve.
In response to questions, Mr. Ryan stated that a 5-to-10 year transition period would be needed in moving to a new discount rate system. He also explained that it would be a straightforward matter to build a yield curve with Treasuries.
Mr. Ryan advocated the government selling bonds of whatever duration, including 30-year bonds, the market demands. He also explained that the ability of plans to match obligations with fixed income securities of the same duration would decrease volatility.
In comparing the depth and breadth of the corporate bond market to the market for Treasuries, Mr. Ryan said: “most corporate bonds are below $400 million in size. A $1 billion Treasury issue is considered an odd lot.” Further: “This index [Moody’s AA corporate bond] belongs in a museum, not financial statements. It's old, and that's a problem with it. It only has 20 -- excuse me, 16 bonds, nine are utilities and seven are industrials. They all tend to be small issues. Almost half of them have callable features, another distortion. They're only long bonds, no yield curve here. It doesn't include finance, and I think you heard Steve Berkley talk that finance now is the major part of the corporate bond market today. No finance paper in this index. No zero-coupon bonds, no yield curve, no finance. It's supposed to represent a current yield, but since half of the bonds are callable, it violates its own rules. It's a mess. It even has a weighting problem…”
June 26, 2003: Working Group on Defined Benefit Funding
- Official Transcript
- Questions Posed to Witnesses
- “Smoothing the Waves of the Perfect Storm: Could Changes in Pension Funding Rules Ease the Burden for Pension Funds?” by Christian Weller, Economic Policy Institute, and Dean Baker, Co-Director, Center for Economic and Policy Research
- “Fixed Payout Annuity Pricing” by Howie Kurpit, Vice President and Senior Actuary, MetLife
- Letter regarding Defined Benefit Funding and Discount Rate Issues from Randel K. Johnson, Vice President, and Alicia Wong, Direction of Pension Policy, Labor, Immigration and Employee Benefits, U.S. Chamber of Commerce
- PowerPoint Presentation by Vince Snowbarger, Assistant Executive Director; Stuart Sirkin, Department Director, and Jane Pacelli, Actuary, Pension Benefits Guaranty Corporation (PBGC)
- Statement for the Record by Christine L. Owens, Director of Public Policy, AFL-CIO, before the Subcommittee on Select Revenue Measures Committee on Ways and Means, U.S. House of Representatives from April 30, 2003 – provided by Shaun O’Brien, Assistant Director, Public Policy Department, AFL-CIO
- Testimony of Kenneth W. Porter, Director, Global Benefits Financial Planning, DuPont, on behalf of the ERISA Industry Committee, and news release, “ERIC Urges ERISA Advisory Council to Endorse Prompt Action to Replace 30-Yr. Treasury Rate”
- Testimony of Kenneth Steiner, Actuary, Watson Wyatt Worldwide, on behalf of the American Benefits Council and news release, “Council Urges DOL Advisory Panel to Support Portman-Cardin 30-year Treasury Rate Reform”
- Wall Street Journal editorial “A Pension ‘Guaranty’”
- Statement by Adrien R. LaBombarde, ASA, EA, Consulting Actuary, Milliman USA
July 24, 2003: Working Group on Defined Benefit Funding
- Official Transcript
- ERISA Industry Committee – ERIC Updates from July 21, 2003 regarding the committee’s proposal in “Portman-Cardin Bill Advances but Political Dispute Clouds Future”
- Written Testimony of Kenneth A. Kent, FCA, FSA, MAAA, a member of the Pension Practice Council of the American Academy of Actuaries and Mercer Human Resource Consulting
- Written Testimony of Christian E. Weller, Ph.D., Economist, Economic Policy Institute
- Testimony of Judith Mazo, Senior Vice President and National Director of Research, the Segal Company, representing the National Coordinating Committee for Multi Employer Plans, citing multi employer pension plan funding and termination rules as well as NCCMP’s Emergency Investment Loss Proposal, and Segal’s Employer Universe Newsletter Article, “Another Rough Year: Multi Employer Funds Hit Hard by Disappointing Investment Performance in 2002”, Spring 2003 edition.
- Statement of Captain Duane E. Woerth, President, Air Line Pilots Association
- Statement of Randel K. Johnson, Vice President, Labor, Immigration and Employee Benefits at the U.S. Chamber of Commerce, delivered by Peter Kelly, a member of the Employee Benefits Policy Committee for the Chamber, as well as a news release by the Chamber
- Slides Presentation by Steven Berkley, Managing Director and Global Head of Fixed-Income Indices, Lehman Brothers
- “A Financial Lab” Presentation by Ronald Ryan, President of Ryan Labs, as well as an extensive Appendix.
- Written Remarks of Jeremy Gold, Jeremy Gold Pensions, as well as “Weak Pension Funding Standards Backdoor Loan Guarantees,” an email he previously forwarded to the Working Group Chair on Mary Williams Walsh’s July 8, 2003 New York Times article on “White House Seeks Revised Pension Rules” and Gold’s views to the proposal as well as a copy of the comments he made before a March 13, 2003 Senate Finance Committee Hearing on Defining the Current Liability in the Context of Pension Funding
- A complete packet of testimonies made July 15, 2003 before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means
September 23, 2003: Working Group on Defined Benefit Funding
- Official Transcript
- Rough Draft of Group’s Final Report
- Media Packet containing recent articles on legislation, including “Committee Approves Grassley Bill to Protect Employees’ Pensions” from the U.S. Senate Committee on Finance News Release, September 17, 2003; “Senate Panel Votes for Reform of Pension Rules” by Albert B. Crenshaw, Washington Post, September 18, 2003; “Finance Committee Gives Grassley Pension Bill the Go-Ahead,” Plan Sponsor Online, September 18, 2003; “House, Senate Work on Pension Plan Relief,” Jim Abrams, The Associated Press, September 17, 2003
- Dana M. Muir, Chair
- Mary B. Maguire, Vice Chair
- Ronnie Sue Thierman, ex-officio, Chair of the ERISA Advisory Council
- David Wray, ex-officio, Vice Chair of the ERISA Advisory Council
- R. Todd Gardenhire
- Thomas C. Nyhan
- Antoinette Pilzner
- C. Mark Bongard
- Donald B. Trone
- Judy Weiss
- Norman Stein
- John Szczur
- John S. Miller, Jr.
- Robert B. Patrician