I. BACKGROUND

Senate Resolution 235, Section 4, of March 1, 1972, authorized the Committee on Labor and Public Welfare to ". . conduct a general study of pension and welfare funds with special emphasis on the need for protection of employees covered." This resolution followed a similar resolution of the prior session which had mandated a study and investigation of such pension and welfare funds.

In February 1972, based upon an analysis of various private pension plans, the Subcommittee on Labor issued an Interim Report 1 and published a number of findings which identified the deficiencies in the nation's private pension plan system directly responsible for the failure of workers to realize pension benefits which they had been led to believe would be theirs. The Subcommittee report set forth specific legislation recommendations and concluded that federal legislation was essential in order to correct these deficiencies and produce the necessary reforms required within the system.

Among the recommendations made by the Subcommittee for reform was one which called for "a federal law establishing systematic requirements for funding of pension plans, accompanied by a program of plan termination insurance to cover unfunded vested benefits." This recommendation was based upon a finding of the Subcommittee that "Various deficiencies and hardships are inflicted upon working men and women as the result of the lack of mandatory requirements or controls in the operations of plans. The deficiencies which the Committee found to be the principal causes of or contributing in some measure to the hardships sustained by American working men and women related to . . . inadequate accumulation of assets in funds to meet obligations and payments to workers who are entitled to benefits; ... instances where employers have not achieved full funding status, but through circumstances often beyond their control, must terminate the plan without adequate resources for payment of benefits due ." To determine the nature, scope and character of pension plan terminations, their causes and impact upon employees, the Subcommittee recommended further study of terminations. This further study was desirable, because for nearly ten years, discussion of plan terminations had centered around the Studebaker debacle of 1964. In that well-known case, the Studebaker plant in South Bend, Indiana, a victim of rising costs and low sales, closed its doors and terminated its pension plan, affecting the retirement security of 10,500 workers. The company had recently celebrated its 100th birthday; the pension plan, although only 14 years old, had been regularly funded up to that point and had $25 million in assets. But, as the late Walter Reuther said at hearings before the Senate Finance Committee in 1966, "Assets are a relative thing. You have got to

Interim Report of Activities of the Private Welfare and Pension Plan Study, 1971: Report of the Committee on Labor and Public Welfare, U.S. Senate, Made by its Subcommittee on Labor, pursuant to S. Res. Section 4 (92nd Congress, 1st Session) (Together with Additional Views) February 22, 1972, Report No. 92-634

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measure the assets against the obligation. And when we did that, we found that there were 10,500 workers who had a claim on the $25 million." The distribution of the assets so that the 3,600 people already retired or eligible to retire would continue to receive their anticipated income, left 4,000 vested employees between 40 and 60 with only 15% of their anticipated benefits, and 2,900 workers under 40, vested or not, with absolutely nothing.

The Studebaker case has since been the subject of extensive investigation and inquiry by Congress. In addition to the 1967 Finance Committee hearings, there was the Joint Economic Committee study of private pension plans in 1966-67, featuring testimony and reports on the subject of terminations, with Studebaker as the model. The Subcommittee on Labor received the testimony of Lester Fox, a former employee of Studebaker, at hearings in July 1971, who related the continuing irreversible effect of that closing on the lives of employees.

The Studebaker closing was not the only termination up to that time; it was simply the best known. A study of 4,259 pension plans which terminated between 1955 and 1965, made jointly by the Bureau of Labor Statistics and Internal Revenue Service in 1967 attempted to gather some data on the generally unknown area of plan terminations. But it was from the Studebaker case that there emerged the following model of a plan termination:

1. A plan terminates because the employer is forced to close, sell or merge his business due to losses.

2. The terminated pension plan is only partially funded. In the Studebaker case, the plan was 14 years old, with a funding schedule to meet its obligations to employees 40 years from the inception of the plan.

3. Amendments to the plan have increased benefit liabilities prior to termination.

4. An order of priorities is established in which benefits are distributed first to those already retired and those eligible to retire; next, to older vested employees; and last, to younger vested employees. Eligibility in each category is established by an age or combined age and years of service standard. This order of priorities usually results in certain long-service employees receiving nothing or virtually nothing.

5. No federal law fully protects the employees in terminating pension plans. The employer's right to terminate the plan at any time is a common feature of pension contracts, and the employer's liability is limited to the extent of the contributions made to the plan.

It was found by the Subcommittee on Labor in hearings into the general deficiencies in private pension plans from the workers' point of view that the problem of plan termination did not end with the Studebaker case, and that, despite the many inquiries into the case, no improvements in federal law had been made to alleviate such situations. At hearings in July 1971, George Silver and Earl Machleit, employees of the Michigan Tool Company testified that their 30-yearold pension plan did not have sufficient funds to pay the pensions

"Federal Reinsurance of Private Pension Plans:" Hearing before the Committee on Finance, U.S. Senate, 8th Congress, 2nd Session on S. 1575: A Bill to Establish a Self-supporting Federal Reinsurance Program to Protect Employees in the Enjoyment of Certain Rights under Private Pension Plans, August 15, 1966, p. 50.

Emerson H. Beier, "Termination of Pension Plans: 11 Years' Experience,” Monthly Labor Review, June 1967.

of the employees who were eligible to retire when the company decided to move from Detroit to North Carolina in search of lower operating costs, and prevented the employees from moving with the company. Other witnesses related a similar loss of pensions by retirees of the Ingram-Richardson Company of Pennsylvania. This machine manufacturing plant had been sold to Park Electro-chemical Company in 1965 and liquidated in 1967. Pension payments were stopped by the acquiring company in 1970 because they were under no legal obligation to continue the payments. It was clear that there was more to the termination problem than had surfaced during the Studebaker inquires and the July and October 1971 Labor Subcommittee hearings. Accordingly, the Subcommittee, under the authority of Senate Resolution 235, Section 4, directed its attention to an intensive study of terminations in the 1960's and 1970's.

That there was still much confusion surrounding the rights and obligations of employees and employers is exemplified by this letter from the daughter of an employee of P. Ballantine and Sons, a Newark brewery that ceased operations on March 31, 1972:

"Dear Senator Williams:

"I am writing to you with great concern about a critical situation with which my family is now being faced.

"For twenty-six years my father has been employed with Ballantine Beer Co., in Newark, New Jersey. For this same amount of time he has been a member of the Teamsters Union, Bottlehouse #843.

"I am most certain that you have read numerous newspaper articles concerning the 3.5 million dollar loss by Ballantine during 1971. As a result, the union negotiated and agreed to meet the demands of the company: wage cuts, vacation cuts, and termination of jobs. However, one factor the newspapers failed to publish is, if a buyer is not found within three months, the doors will close, causing thousands of persons to be left without employment.

"In the event this should happen certain questions are raised:

1. Because our country is now experiencing a recession, where does a forty-nine year old man turn? With his youth in the past, he cannot afford to begin again. With no education, trade, or skills could any man honestly try to tell himself that everything will work out, and most of all, have the confidence needed in himself to begin again?

2. Upon looking for a job can the State of New Jersey guarantee that he will not be discriminated against because of the age factor? 3. What becomes of the pension fund? Will the pension plan be completely eradicated?

4. What misfortune will befall those whose pensions are in effect or to those who are nearing retirement age?

5. Are there laws stipulating a guarantee that these persons will continue receiving their pensions?

"It almost seems criminal that after all these years of employment, so many men will now be faced with not only the problem of unemployment, but also the knowledge that all pensions are terminated completely

"As my Senator, I would appreciate any information you can give me regarding this matter. I am aware that you are working on a

Private Welfare and Pension Plan Study, 1971. Hearings before the Subcommittee on Labor of the Comtatter of Labor and Public Welfare, 92nd Congress, 1st Session, Part I, pp. 159 ff and 309 ff.

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program in regard to this letter, but it is impossible to obtain any information on the subject as to how you are progressing.

"I would appreciate a reply Sincerely yours,”.

II. FUNDING REQUIREMENTS OF THE INTERNAL REVENUE CODE

Under existing law, an employer is under no legal obligation to fund his accruing pension costs, and he may deduct as an ordinary and necessary business expense reasonable payments to retired employees or their beneficiaries. In a relatively small percentage of plans, the employer pays these benefits to employees directly from corporate assets as employees retire with no advance funding. Benefit payments are made, therefore, on a pay-as-you-go basis. However, if he wants to enjoy the tax treatment accorded "a qualified pension plan" which gives the employer a deduction for current contributions as well as an exemption from current taxation of investment earnings of the pension assets, he must fund as a minimum under the IRS Code, the current service liabilities and the interest on the accrued unfunded liability.

In essence, therefore, contributions made each year to finance a qualified plan must cover benefits attributable to current employee services and the interest on the unfunded accrued liability of the plan, if any. Many plans have large unfunded accrued liabilities created when credit is given for the past service of the employee (service accomplished before the inception of the plan) or when the benefits under existing plans are increased. Unfunded accrued liabilities may also reflect any deficits arising from the fact that past contributions were inadequate. Contributions to fund these accrued past liabilities are not now required. This is the circumstance at which the current funding proposals are directed.

The President's Cabinet Committee Report of 1965 found that the present standards of funding require strengthening when it recommended:

"Pension plans without adequate funding may turn out to be empty or only partially fulfilled promises. The purpose of concessions granted by the Federal Government to qualified pension plans is to encourage the growth of sound plans which supplement the public retirement security system. This social objective can be served only if funds adequate to pay expected benefits are accumulated. The minimum standards for funding under present tax law do not assure adequate funding. The setting of standards for adequate funding, therefore, becomes an important public concern."

Specifically, the Report recommended that all unfunded liabilities be fully funded over a period that roughly approximated the working life of an employee.7

After years of intensive study into the problems of accounting for pension costs, the Accounting Principles Board of the American Institute of Certified Public Accountants issued Accounting Principle No. 8. This opinion clearly sets forth the maximum and minimum

Regulation of the scope and operative funding requirements are found in the Internal Revenue Code and Regulations, Internal Revenue Code of 1954, Sections 401-4, 501-4.

The President's Committee on Corporate Pension Funds and Other Retirement and Welfare Programs, Public Policy and Private Pension Programs, A Report to the President on Private Employee Retirement Plans (January 29, 1965), p. 51.

7 Supra, p. 52.