Business Roundtable (BRT) is an association of chief executive officers of leading U.S. companies with over $6 trillion in annual revenues and more than 14 million employees. BRT member companies comprise nearly a third of the total value of the U.S. stock market and invest more than $150 billion annually in research and development – nearly half of all private U.S. R&D spending. Our companies pay $163 billion in dividends to shareholders and generate an estimated $420 billion in sales for small and medium-sized businesses annually. BRT member companies provide retirement and health benefits to their employees and their families, including pension plans benefiting millions of workers and retirees.

 

We believe that the best way to protect retirement security is for Congress to sustain a retirement system for private-sector employers that is fair and stable. All pension plans should be systematically funded to ensure that benefits are paid when due, but funding rules should not impose volatile, unpredictable, and untimely contribution requirements on employers. Nor should employers that voluntarily maintain pension plans for the benefit of their employees be threatened with the massive and unjustified premium increases that are then used to fund unrelated federal spending.

 

As outlined below, consideration of carefully tailored action to stabilize pension funding rules is warranted today based on the lessons learned since the economic downturn of late 2008 and the unprecedented interest rate situation we are facing today. On the other hand, the historically anomalous interest rates should not be used as a pretext to justify excessive and unwarranted PBGC premium increases or, conversely, to undermine the important long-term reforms enacted in the Pension Protection Act of 2006 (PPA). Fundamental changes in retirement policy should be undertaken only after careful study of the implications on retirement security and on the economy as a whole.

 

INTEREST RATES AND PLAN FUNDING

 

Under the PPA, a single employer pension plan's1 funded level and the annual funding requirements are determined based on corporate bond interest rates. This conservative measure of liability remains the best measure to ensure the adequacy of pension funds for future retirees. However, short-term fluctuations in interest rates can temporarily distort the measurement of pension liabilities – liabilities that span decades. The PPA funding rules contain limited provisions that reduce (or smooth) the impact of common interest rate variations on the plan sponsor's immediate pension contribution requirements. But the PPA rules did not contemplate the sustained and extraordinary steps the Federal government has undertaken in recent years to drive and hold down interest rates in order to get the economy moving again. Unfortunately, the collateral damage from actions to hold down interest rates artificially is that those low interest rates are triggering artificially high pension liabilities and dramatically larger immediate funding obligations.

 

Without further action by Congress, resources that must be devoted to meet the unexpected new funding mandates will have to be diverted from increasing payrolls and will delay the business investments necessary to create jobs and spur the recovery. This is much more than a cash flow issue for employers that sponsor pension plans. It is about jobs and about the economic recovery, and will directly affect every American. Volatile and unpredictable pension funding requirements, like those employers face today, make it impossible for employers to plan, slowing the economy. Moreover, forcing larger pension contributions as the nation battles to emerge from the current economic downturn will divert resources from capital spending and exaggerate the economic cycle. As Business Roundtable has stated in the past, “procyclical” pension funding requirements, like those we are facing today, result in an economy that overheats more during upturns and has deeper recessions during downturns.2

 

We urge you to consider appropriate adjustments in the plan funding rules that take into account the extraordinary interest rate environment we are experiencing, but that do not undermine the long-term objective of ensuring retirement plans are funded systematically over the long-term. Stabilizing the pension funding rules in a way that minimizes volatility would not only create jobs, but could also help reduce the PBGC’s deficit and strengthen our pension system.

 

PBGC Deficits and Premiums. The PBGC’s own 2010 Annual Report states that: “[s]ince our obligations are paid out over decades, we have more than sufficient funds to pay for benefits for the foreseeable future.” Nonetheless, the PBGC asserts that its reported long-term deficit justifies $16 billion or more in new taxes on defined benefit plans in the form of PBGC premium increases. We strongly disagree.

 

A large portion of the PBGC's reported deficit is the direct result of the Federal government's actions to hold down interest rates. Moreover, serious questions exist regarding the methodology that the PBGC uses to calculate its deficits. As a start, no significant increases in premiums should even be considered until the PBGC fully discloses and justifies its methodology for calculating its deficit and the Congress and the public have the opportunity to review that methodology. Moreover, PBGC premium increases should not be adopted without a thorough investigation of the deficiencies in the benefits administration and payments identified in the last three fiscal reports issued by the agency's inspector general.

 

It is important to keep in mind that PBGC premiums for the single employer program were already increased substantially four times since 1986, mostly recently in 2006. Since 2006, the PBGC per participant premium has been automatically increased for wage inflation, resulting in additional premium increases in 2007, 2008, 2009, and 2010. Moreover, because the PGBC's variable rate premium is based on a plan's funded level, which as discussed above goes down when interest rates decline, PBGC variable rate premium (VRPs) collections have increased dramatically since 2008. As reflected in PBGC Annual Reports, overall, PBGC's single employer program premium collections have been well in excess of $2 billion per year over the last three fiscal years (FY2009-FY2011), an increase of over 66% over the total premiums that were collected in FY2008 and earlier. Almost all of this new premium revenue has been raised through the VRP, with the VRPs paid to the PBGC by single employer pension plan sponsors having increased by over 400% between FY2008 and FY2010. In light of those trends, it is difficult to see how even greater premium increases are warranted, especially in the current economic climate.

 

In any event, further increases in PBGC premiums should only be considered after all the potential implications on the economic recovery and the defined benefit system are thoroughly considered. In particular, massive increases in premiums like those proposed by the PBGC could accelerate the exodus from the pension system, undermining retirement security and leaving the PBGC without plans to support it. We continue to believe that the best way to deal with any long-term financial problems at the PBGC is to keep more employers in the system, not to tax them out of the system.

 

Mr. Chairman and members of the Subcommittee, we thank you for the opportunity to share our views. We look forward to working with the Committee on the challenges facing our pension system as well as proposals dealing with the PBGC.

 

END NOTES

 

1 Our testimony today focuses exclusively on the single employer pension plans and the PBGC's single employer benefit guaranty program.

 

2 Research done at the request of the Business Roundtable in 2005 by Robert F. Wescott, PhD. confirms that the failure to appropriately smooth interest rates fluctuations would exaggerate economic downturns. Dr. Wescott is an economist who works on and pension savings issues who served as Chief Economist at the Council of Economic Advisers and as Special Assistant to the President for Economic Policy. The study was reviewed by Professor Deborah J. Lucas, Household International Professor of Finance, Department of Finance, J.L. Kellogg Graduate School of Management, Northwestern University, and Professor Stephen Zeldes, Benjamin Rosen Professor of Economics and Finance at Columbia University’s Graduate School of Business, and chair of the school’s Economics Subdivision.