SUBTABLE 3-1B.-DISTRIBUTION OF AGE AND SERVICE REQUIREMENTS FOR PRIVATE PENSION PLANS WITH VESTING ELIGIBILITY BASED ON AGE AND SERVICE, BY PLAN AND BY PARTICIPANT

Note: The sum of individual items may not equal totals because of rounding.

TABLE 3-2.-DISTRIBUTION OF TYPES OF VESTING PROVISIONS USED IN PRIVATE PENSION PLANS, BY PLAN AND

Note: The sum of individual items may not equal totals because of rounding.

100

100

TABLE 3-4.-SUMMARY OF REQUIREMENTS TO BE ELIGIBLE FOR VESTING OF PROFIT SHARING PLANS, BY PLAN AND BY PARTICIPANT

Note: The sum of individual items may not equal totals because of rounding.

SUBTABLE 3-4A.-DISTRIBUTION OF SERVICE REQUIREMENTS FOR ELIGIBILITY FOR VESTING IN PROFITSHARING PLANS,1 BY PLAN AND BY PARTICIPANT

Note: The sum of individual items may not equal totals because of rounding.

TABLE 3-5.-DISTRIBUTION OF TYPES OF VESTING PROVISIONS USED IN PROFIT-SHARING PLANS, BY PLAN

Note: The sum of individual items may not equal totals because of rounding.

FUNDING

Funding, as used in this study, refers to the advance financing of private pension benefits. It is generally accomplished by the periodic payment or transfer of assets into a trust fund, or payment to an insurance carrier, with the goal of accumulating sufficient assets to finance the accrued pension benefits of employees when they retire. The amount of the periodic contributions made to a trusteed pension plan generally is based on determinations made by an actuary. The payments made to an insurance carrier represent the periodic contributions made to an insured plan. The amounts are based on actuarial determinations made by the insurance company.

On the basis of its review of current literature, testimony of experts in the pension field and discussions with pension plan participants and representatives of private industry, the Subcommittee has found that a majority of people look at the relationship of the assets of a pension plan to the liabilities for accrued retirement benefits as an indication of the status of funding of a pension plan. The prevailing view is that the higher the ratio of assets to accrued liabilities, the greater the prospect that the participants' total accrued benefits will be paid.

Although this ratio of assets to liabilities can easily be found by comparing plan assets with liabilities, the value of assets and liabilities is not always easily determinable. Assets of pension plans may be valued at book, cost, or market value, or by a combination of these methods. Book value is generally based on the assumption that the assets will be retained for a long time; assets that are generally held for long periods of time include real estate and debt investments held until maturity. Cost value, as the name implies, represents a valuation based on the cost of acquisition of the asset. Many persons in private industry believe that book value and cost value of assets are synonymous. This belief was confirmed in that 453 of the 1026 pension plan questionnaires received reported book value and cost value of assets as identical amounts.

Market value of assets represents the current value of an asset if it is to be converted to cash or exchanged for another asset. Marketable securities, such as common stocks, are frequently valued at market. An illustration of how the dollar amount of assets may be affected by the method of valuations is found in one company's response to the P-1 questionnaire:

Assets:

Book value..
Cost value..

Market value.

$474, 256, 240

464, 124, 434 505, 687, 237

The determination of the liabilities of a pension fund also is subject. to significant variations. Whereas for purposes of accounting, liabilities are generally firm amounts, the determination of liabilities in accordance with actuarial principles can and does vary considerably. In de

termining the amount of accrued benefits, actuarial assumptions must be made regarding rates of mortality, interest, turnover, disability and retirement. Moreover, since several acceptable methods for the determination of employee turnover and mortality rates are employed by actuaries, it is apparent that the determination of liabilities among actuaries can and does vary.

Bearing these qualifications in mind, the Subcommittee in the P-1 questionnaire sought to gather information on the status of funding of private pension plans. The Subcommittee expected that the information requested regarding assets and liabilities would be readily available to the plan administrators for the following reasons: Financial reports must be filed annually for those plans with 100 or more participants with the Secretary of Labor under regulations made by the Secretary pursuant to Section 5 of the Welfare and Pension Plans Disclosure Act (29 U.S.C. 304). Standards for accounting for the cost of pension plans were issued by the Accounting Principles Board of the American Institute of Certified Public Accountants (Accounting Principles Opinion Number 8) in November, 1966.

In view of the variations explained above, P-1 responses to questions relating to funding were inconsistent. Of the 1026 pension plans reporting, 822 reported assets valued at book, 754 reported assets valued at cost, and 815 reported assets valued at market. Six hundred and twenty-seven administrators reported assets for each of the three methods of valuation. With respect to liabilities, 727 plans reported total accrued liabilities and 630 plans reported total accrued vested liabilities. The number of responses that included both assets and liabilities was substantially lower. For example, for the pension plans funded through the medium of a trust, only 469 of 724 responses included both assets at market value and total accrued liabilities.

The responses for insured plans regarding assets and liabilities were even less complete. The Subcommittee believed that the lack of adequate responses in many instances occurred because the plan administrators, who completed the questionnaires, did not report the information that was available from the insurance carriers. The number of questionnaires reporting both assets and liabilities was so low that these insured plans were not included in the analysis.

Tables 4-1 and 4-2 summarize the ratio of assets at market value to liabilities for total accrued benefits and to liabilities for accrued vested benefits. Many administrators reported a high ratio of assets at market value to liabilities for total accrued benefits. Two hundred and fourteen of 469 plans (46 percent), covering 37 percent of the participants,_reported an assets-liabilities ratio of 76 percent or greater (see Table 4-1), and 300 of 402 plans (75 percent), covering 69 percent of the participants, reported a ratio of assets to vested liabilities of 76 percent or more (see Table 4-2). A substantial number of plans, however, reported a low ratio of assets to liabilities. About a third of the plans, covering one-third of the participants, reported a ratio of assets to total accrued liabilities of 50 percent or less; 11 percent of the plans covering seven percent of the participants, reported a ratio of assets to vested liabilities of 50 percent or less.

Many pension experts have testified that there is a relationship between the value of assets and liabilities of a plan and the age of a plan: the ratio is low when plans are young and becomes higher when the plan matures.