January 14, 2003
Statement of Steven A. Kandarian
Pension Benefit Guaranty Corporation
before the Subcommittee on Labor,
Health and Human Services, and Education
Committee on Appropriations
United States Senate
Mr. Chairman and Members of the Subcommittee:
Good afternoon. I am Steven A. Kandarian, Executive Director of the Pension Benefit Guaranty Corporation (PBGC). With me today is PBGC's General Counsel, James Keightley. We want to thank you, Mr. Chairman, for holding this hearing and for the opportunity to testify on this very important matter.
You have asked me to address the PBGC General Counsel's legal opinion that PBGC may not terminate and immediately restore US Airways' pension plans in order to provide the company with a longer period over which to fund its plans. You have also asked me to address whether the law should be changed.
Before turning to those issues, I would like to provide some background on the role PBGC plays in ensuring a secure retirement for American workers, and on the relevant pension funding rules.
Structure of PBGC
PBGC was created as a federal corporation by the Employee Retirement Income Security Act of 1974 (ERISA). PBGC protects the pensions of about 44 million workers and retirees in about 35,000 private defined benefit pension plans. PBGC has a three-person Board of Directors -- the Secretaries of Commerce and the Treasury and the Secretary of Labor, who is the chair.
It is important to note that PBGC receives no taxpayer dollars. PBGC is funded by premiums paid by sponsors of defined benefit plans. Every company that sponsors a defined benefit plan pays to PBGC an annual flat-rate premium of $19 per participant. In addition, sponsors of certain underfunded plans, which pose a greater risk to the insurance system, pay an additional variable-rate premium based on the degree of their underfunding.
Past Congressional Action to Tighten Funding Rules
PBGC was in a deficit position for its first 21 years of existence. To address the causes of the deficit, Congress amended PBGC's governing law in 1986, 1987, and 1994 to increase premiums, to tie premiums more to exposure, to prevent ongoing companies from "dumping" their underfunded plans on PBGC, and to tighten the funding requirements for underfunded plans. Two key elements of the tighter funding requirements were:
- Accelerated funding for plans that were generally less than 90 percent funded, and
- Stricter limits on the granting of waivers from the funding requirements.
Accelerated Funding Requirements
When ERISA was enacted in 1974, Congress allowed employers with existing pension plans 40 years to pay unfunded past service liabilities, and new plans were allowed 30 years to pay these liabilities. At that time, Congress viewed the funding rules and PBGC insurance as closely linked. As the Finance Committee stated:
"The termination insurance program is intended to work hand-in-hand with the minimum funding standards imposed by the bill, since the latter will limit the losses due to plan termination by requiring more adequate funding of pension plans."
Report of the Committee on Finance on S. 1170, S. Rep. No. 93-383 at 26 (1973).
Since 1974, Congress has acted repeatedly to tighten the funding rules to require faster funding and greater protections for participants and the pension insurance system. In 1987, Congress added accelerated funding rules for certain underfunded plans. These rules require employers to fund pension liabilities over 5 to 7 years rather than over 30 to 40 years.
When Congress strengthened the funding requirements in 1987, the Finance Committee concluded:
"An employer should not have the opportunity to make pension promises that exceed its financial capacity to meet its promises. In order to reduce the financial risk to plan participants and the PBGC, the amendment requires certain plans to be funded more rapidly depending on the funded status of the plan."
(Omnibus Budget Reconciliation Act of 1987, 100th Cong., 1st., "Explanation of Provisions Approved by the Committee on December 3, 1987 for inclusion in leadership Deficit Reduction Amendment," p. 170.)
In addition to strengthening the funding requirements, Congress also placed stricter limits on the IRS's granting of waivers from the funding requirements. A funding waiver allows a company to defer payment of funding contributions in the event of temporary business hardship. When ERISA was enacted, the IRS was granted authority to give a funding waiver to an employer suffering from "substantial business hardship."
In 1985 and again in 1987, Congress acted to tighten the requirements for funding waivers because of concern that funding waivers were being misused. As a result, Congress limited waivers to no more than 3 waivers in a 15-year period, reduced the 15-year waiver repayment period to a 5-year period, and required the IRS to consult with PBGC over proper security for any waiver over $1 million.
The Senate Finance Committee explained that these tighter waiver rules were necessary and appropriate because:
"It is believed that employers have used funding waivers in the past to minimize plan contributions during the period immediately preceding the termination of a plan. The GAO report found that 30 percent of the claims against the PBGC arising during the period 1983-1985 resulted from the failure of employers to make required plan contributions prior to plan termination. The GAO concluded that significant percentages of the large claims represented required contributions that were overdue or had been waived by the IRS.
"Under present law, funding waivers are equivalent to an extension of credit from a plan to the employer that normally would be treated as a prohibited transaction. It is believed that such an extension of credit is not appropriate unless adequate safeguards apply to protect participants' benefits. Plan participants should not be required to finance the continuing operations of an employer by placing their retirement benefits at risk.
"Further it is believed that the integrity of the plan termination insurance program will be jeopardized if employers have the opportunity to avoid liability for their pension promises at the expense of other employers who moderated their promises or are more financially secure and remain in the defined benefit system." [Emphasis added.]
(Omnibus Budget Reconciliation Act of 1987, 100th Cong., 1stSess., "Explanation of Provisions Approved by the Committee on December 3, 1987 for inclusion in leadership Deficit Reduction Amendment," p. 181.)
US Airways Request
US Airways is currently undergoing reorganization in bankruptcy court. It has applied for a loan guarantee from the Air Transportation Stabilization Board. To obtain a loan guarantee, US Airways must present a business plan that demonstrates that it can repay the loan based upon reasonable financial assumptions.
US Airways has asserted that it cannot satisfy the Board's conditions and also make required pension contributions. US Airways also has asserted that the existing funding waiver process would not provide sufficient financial relief. Consequently, US Airways came up with a creative solution: the functional equivalent of a "super waiver." US Airways asked PBGC to terminate the company's pension plans, immediately restore those plans, and provide 30 years to fund them. US Airways asserts that PBGC has the authority to do this under section 4047 of ERISA.
Section 4047 authorizes PBGC to restore a plan to its "pretermination status" whenever PBGC determines that restoration of the plan is "appropriate and consistent with its duties" under Title IV of ERISA. The PBGC's General Counsel concluded that this authority is not broad enough to justify restoration solely for the purpose of giving an employer a liberalized funding schedule.
The 1974 Conference Report on ERISA made clear that the purpose of section 4047 was to allow PBGC to restore a plan "if the employer and plan enjoyed a favorable reversal of business trends, or if some other factor made termination no longer advisable." This concept is inconsistent with the "pre-packaged" termination/restoration proposal by US Airways.
There is nothing in the statute, the legislative history, or the regulations that would give PBGC the power to terminate a plan and then immediately restore the plan with easier funding rules in order to assist an ailing corporation. In fact, IRS, not PBGC, has statutory authority for plan funding under ERISA, including waiving funding requirements for corporations in temporary financial difficulty.
US Airways also cites as precedent PBGC's restoration of three LTV steel plans with a modified funding schedule. Mr. Chairman, the LTV situation was very different.
PBGC terminated the LTV plans in January 1987. Immediately after PBGC terminated the plans, however, LTV set up follow-on benefit arrangements. In other words, an ongoing corporation dumped its pension liabilities on the insurance system and then attempted to provide its workers with substantially the same benefits (in combination with PBGC's guaranteed benefits) as if the plans had never terminated.
Almost a year later, PBGC used section 4047 to restore the plans to LTV because it found that the follow-on benefit arrangements were abusive to the pension insurance system. After three years of litigation, the Supreme Court upheld PBGC's restoration decision.
In October 1990, the IRS issued special funding regulations to address the problems of the LTV restoration, where the plans had been terminated for some time before being restored. The IRS provided these special funding rules because it concluded that, "[u]nderfunding will be significantly increased if the plan has been administered as a terminated plan for an extended period of time." In no way do the regulations suggest that the usual funding rules should be disregarded, that the IRS's authority over plan funding should be transferred to PBGC, or that PBGC should terminate plans solely for the purpose of then restoring them with eased funding requirements.
Mr. Chairman, you also asked me to address the question of whether the PBGC should have expanded authority under section 4047 to terminate and then restore plans with a new, substantially lengthened funding schedule. The PBGC does not desire such expanded authority because it would put at risk the retirement security of 44 million Americans whose pensions are insured by PBGC. PBGC believes that terminating and restoring plans of corporations in financial distress would set a dangerous precedent for the pension insurance system. Moreover, the termination/restoration process proposed by US Airways would be inconsistent with Congress' enactment of strengthened funding schedules.
The US Airways proposal would in effect make the PBGC and the other workers and plan sponsors in the defined benefit system lenders to an ailing company. Providing this special relief to US Airways would give other financially distressed companies a blueprint for how to "borrow " from their pension plans at the expense of the pension insurance system. If US Airways, why not other financially troubled airlines? If airlines, why not companies in other industries?
In closing, I would like to repeat the point that the Senate Finance Committee made in 1987 when it limited waivers of the funding rules.
"The integrity of the plan termination insurance program will be jeopardized if employers have the opportunity to avoid liability for their pension promises at the expense of other employers who moderated their promises or are more financially secure and remain in the defined benefit system. "
That was a sound observation then, and it is a sound observation today.
Mr. Chairman, I thank you again for the opportunity to appear before the subcommittee today. I will be happy to answer your questions.