funding standards which corporations, both public and private, must follow in order to secure certified accounting statements. However, it must be remembered that these requirements for calculating pension costs are merely accounting principles. They do not carry the mandate of federal law or enforcement.8 As the Subcommittee hearings have dramatically illustrated, the eclectic nature of these various requirements, both public and private, underscores the insufficiency of the present level of protection for the retiree. Even the enforcement of the minimum requirements of the IRS Code is based only on the power of the IRS to grant or deny qualified status to a pension plan. It is possible for an employer to operate an unqualified plan on a pay-as-you-go basis. The present statutory requirements for plan qualifications are limited and as the Cabinet Committee Report observed, these requirements are not directed at assuring adequate funding; rather they are designed to prevent tax abuses. The testimony of employees verifies the fact that they expect the employer to fulfill his funding commitment once the pension promise is made. Generally, they are not aware that under existing law an employer may limit his liability to even a qualified plan. A typical clause found in the plans studied in these hearings protects the employer against the liabilities created by plan termination, reserving the right to discontinue contributions to the plan at any time and providing that if a plan terminates, the participants or beneficiaries must look to the accumulated assets in the pension fund for the satisfaction of their claims. Thus, if the funds in the plan are inadequate. to cover all the pension credits that the employees have earned and the employer elects to discontinue payments into the plan (or is forced by insolvency to do so) many employees will not receive the pension benefits they expected. The study of plan terminations brought the focus of public attention to another problem involved in pension plan termination. the IRS Code provides at Section 401(a) (7) that in the event of termination of a plan all benefits must vest to the participants whether they are vested under the terms of the plan itself or not. The apparent reason for the requirement is that the failure to provide for vesting at termination could result in discrimination if the termination of a plan's fund were allocated only to long-term employees at the expense of the rank and file. Despite the tax regulations, however, employees are being denied their benefits due, in part, to the fact that in many instances the sponsoring company does not close down in entirety. The plan is therefore not terminated and the mandatory vesting does not occur. The Code merely covers "termination" or "complete discontinuance of contributions under the plan". It says nothing about Bee Accounting Principles No. 8, Appendix 1. For example. Article X, "Certain Rights of Company", Section 10.02, "Termination of Entire Plan", In the Minneapolis-Moline Pension Plan for Hourly Employees: Section 10.08-Termination of Entire Plan The company shall have the sole right at any time to terminate the entire Plan. In the event of such termination, the funds of the Plan shall be used to the extent adequate for the purposes as follows: To provide for the continuation of pension payments to all pensioners who shall have retired prior to the date of such termination without reference to the order of retirement and to the beneficiaries and continannuitants of such pensioners under optional settlements duly elected in accordance with the provisions of the Plan. To provide for pensions upon subsequent retirement as if the Plan were then in effect to employees who were participants age 65 or over at the date of such termination, without reference to the order in which they shall have reached such age or the order in which they shall retire. To provide for pensions upon subsequent retirement as if the Plan were then in effect to employees who were participants under age 65 at the date of such termination in the order in which they retire. partial terminations; consequently, the closing of one unit or plan among many is deemed not to affect a termination, even though significant portion of the employees may be separated, losing thei vested benefits. III. PLAN TERMINATION HEARINGS CONDUCTED BY THE SUBCOMMITTE In its efforts to more clearly define the problems resulting from th private pension terminations of the 60's and 70's, and to find in novative ways to deal with them, the Subcommittee conducted series of hearings in various cities of the United States, which knew from its research represented typical problems in many other The hearings were specifically designed to bring to public attentio actual instances of workers being denied pension benefits which the had been led to believe they would receive for life, due to eithe merger, shut-down or relocation of their businesses. In preparation for these hearings, the Committee staff investigate more than 115 employers whose pension plans had been terminate for a variety of reasons and which had resulted in denial or reduction promised pensions to the workers covered. These hearings were part an investigation, not a survey. They were not designed to produc statistically representative results, but instead were an attempt t explore in depth representative cases in order to determine from th employees and the employers themselves the causes and effects o such pension denials. They were further designed to test whethe existing legislative proposals provided adequate solutions to the new problems which had arisen since the Studebaker case. The cases selected by the Subcommittee for hearing purpose represented a cross-section of American industry and geographica locations. In its survey, it became apparent to the Subcommitte that the heaviest losses by employees were concentrated principall in manufacturing and in the more industrialized sections of th East and Midwest. Of the following eleven cases which were hear by the Subcommittee in these field hearings, eight were employer who were involved in machine manufacture, one was a metal process ing plant, one a brewery, and one a food service organization. Benson Mfg. Co. (Electronic Communications, Inc Gar Wood Division, Sargent Industries, Dominion Electri Philadelphia, Pa. (chaired by Senator Richard July 17, 1972 Horn & Hardart, Baldwin-Lima-Hamilton (Greyhound). S. Schweiker). In nearly all of the cases heard by the Subcommittee, a busines had terminated plant operations following a merger or acquisition by a conglomerate, leaving hundreds of employees without jobs. Th pension plans of each terminating company were invariably found t have a low ratio of assets to liabilities, causing one or more of the classes of employee participants to lose part or all of the benefits prom ised and due them. In certain cases, even retired employees who had been receiving pensions were cut off from future benefits. A common denominator among all the cases was a general lack of understanding by employees of their pension rights, and an absence of communication between employees and employer. Not infrequently, employees were not even informed of the disposition of the pension plan, and in at least one case, the employer discontinued contributions to the pension plan without even informing the participants. Other common traits exhibited themselves throughout all of the companies whose pension plans became the subject of field termination hearings. There was a high incidence of conglomerate takeover of long-established independent businesses shortly preceding the termination; and there were incidences of fluctuations in pay immediately preceding the termination. In the P. Ballantine & Sons closing, this old "family" brewery of Newark, N.J., had been sold in 1969 to Investors Funding Corp. of New York, a conglomerate with primary holdings in real estate. Although Ballantine had been losing money over a period of years, the losses accelerated after the IFC takeover. When IFC made its decision to sell Ballantine, they at first attempted to sell the entire business, thus keeping the brewery open and the employees in their jobs. However, the inability to find a buyer for the entire operation forced them to sell only the trademark and distribution rights to Falstaff Brewing Co. of St. Louis. In the announcement to the press of the sale, Investors Funding Corporation said "it was getting out of the beer business". Minneapolis-Moline, Inc. of Minnesota had been purchased by White Motor Corporation in 1963. White Motor had another farm equipment manufacturing operation in Charles City, Iowa, and when Minneapolis-Moline, Inc. began to lose money, they made the decision to close that company and consolidate all farm machinery operations at Charles City with the Oliver Corporation. In both these instances decisions to close left more than 1,000 employees without jobs; in both instances the pension plans had been only partially funded by the original company and, in both cases, benefit increases had been announced to the employees shortly before the termination. Other companies which closed shortly after a corporate takeover were the Dominion Electric Company in Mansfield, Ohio, acquired by the Scovill Mfg. Co. of Waterbury, Connecticut; the Griscom-Russell Company of Massillon, Ohio, which had become part of the BaldwinLima-Hamilton complex in 1962; American Zinc Co. of St. Louis, a subsidiary of Gold Fields Inc., a London conglomerate; the Benson Manufacturing Co., acquired by National Cash Register in 1965; Colombus Malleable, which came under the control of the Kensington Investment Corp., and the Baldwin-Lima-Hamilton organization itself, which was acquired by Greyhound in 1970. In most of the terminating companies, actual shutdown had been preceded by fluctuations in the labor force. Layoffs were common as the company sought to retard its losses. These layoffs would frequently have the result of suddenly increasing the demands on the fund (as many employees eligible for retirement or a vested interest exercised their options) and simultaneously decreasing company contributions (which are invariably based on a percentage of the current payroll). Preceding a termination, agreements were often reached between management and labor which resulted in salary and benefit reductions for union employees. The Ballatine workers agreed to an across-theboard 5% reduction on January 12, 1972, in the belief that this would "save the brewery" (and their jobs); nevertheless, these same workers learned on the radio on March 3, 1972, that the brewery had been sold and they would lose their jobs. At the time of the Minneapolis hearings, the Minneapolis-Moline employees were still negotiating with the White Motor Corp. over terms for the reduction of wages and the retention of jobs. These employees also had been willing to take a sizeable cut in pay, in order to retain jobs for some of the workers; agreement between company and employees on what the wage cuts would actually mean in dollarsper-week losses, however, were difficult to reach. It was interesting that at some of the terminated companies, the presence of the conglomerate had signalled to the employees a belief that their futures would be even more secure than they had been under the old privately-owned corporate structure. Ballantine, Minneapolis-Moline and Dominion Electric workers told the Subcommittee that they believed "the big company would take care of us". Yet when the businesses began to fail workers claimed that poor management or indifference on the part of conglomerate management had been the cause. In fairness to the employers, it must be noted that the businesses had sometimes been sold to the conglomerate in the first place because they had been losing money, as the pressures of competition became too much for the independent manager to bear. However, one of the most striking examples of how the conglomerate was unable to make good its promises is seen in the Griscom-Russell situation. This Massillon, Ohio, company, a manufacturer of heat exchanges, shut down in 1962 after over 50 years of operation. Two years previously, it had been purchased by Hamilton-Thomas Corporation of Hamilton, Ohio. In 1962, the Baldwin-Lima-Hamilton Corp. purchased control and gave notice to Griscom-Russell employees that the plant would shut down three months later. The reason given for shut-down was to move a product division and in turn strengthen a plant at Eddystone, Pa. At the time of shut-down there were 65 retired employees and 523 active employees, all of whom received a benefit reduced by 64%. Ironically, ten years later, the Baldwin-Lima-Hamilton Co. also terminated the pension plan at the Eddystone, Pa., facility on April 30, 1972, and approximately 500 vested workers will receive only approximately 33 to 41% of their entitled benefits. IV. FUNDING Underfunding of the pension plans of the affected companies was common at time of shutdown. When the Gar Wood Division of Sargent Industries Pension Plan for Hourly Employees terminated in 1971, the fund assets were $267,000 as opposed to unfunded vested liabilities of $1,030,000. This meant that the 112 retirees at time of closing had their benefits reduced by 62% while there were no remain ing funds to purchase annuities for the 75 vested participants, who lost everything. At Ballantine, 1011 vested hourly workers face severe losses from their terminated pension plan: this multiemployer brewery workers' plan has assets of approximately $19 million with unfunded vested liabilities of over $53 million. Former employees of the Benson Manufacturing Company in Kansas City, Missouri, have filed suit in Federal District Court to recover pension monies lost when the pension plan terminated in July 1971 with a total value of vested benefit funding at $920,122 to cover 41 retired and 240 active employees. Frequently the actuaries for the terminating company had prepared a report showing the pension funds to have insufficient assets to cover vested liabilities. The Wyatt Company, in preparing a report of the Minneapolis-Moline Pension Fund for Hourly Employees for the White Motor Corp. stated "we would again like to call your attention to the critical financial condition of the Fund. The gross actuarial deficiency for retired employees ($9,449,700) exceeds the market value of assets ($3,413,600) by some $6,036,100. The fact that this deficiency is only 36% funded is particularly serious in light of the increases in benefits which will become effective in 1971 and 1972," The reasons for the underfunded condition of these pension plans vary, and it was not always the company management or plan administrator who was entirely responsible. On occasion, a misjudgement concerning one of the actuarial assumptions upon which contributions are made would affect the funding situation, particularly when—as resulting from the stock market decline of 1969-70-the rate of investment return was overstated. It is also a recurrent phenomenon that a pension benefit increase will have preceded the termination, thereby creating a new and oftimes sizeable liability for the fund. There is usually a considerable divergence of opinion on this particular point, with the employer claiming that the benefit increases were the main cause of the large unfunded liabilities, and the employees claiming that the benefit increases granted just prior to termination were done so with full knowledge that the plan would terminate and the increases would become academic. This was the case with both Ballantine and Minneapolis-Moline. Most importantly, the most frequently encountered explanation set forth by the various companies for the insufficient funding was that they were in fact in compliance with the Internal Revenue Service regulations concerning a minimum level of funding (see pp. 6,9) and that any sizeable increase in their yearly contribution might even exceed the maximum contribution which a company could make and still receive a tax deduction (See above, pp. 7, 9). In effect, then, it was widely perceived, by both employers and employees alike, that the present Internal Revenue Service regulations and practice, rather than acting to protect workers from the perils of pension loss at termination, might actually be discouraging a fuller funding of the pension plan. It was also constantly reiterated, that the very existence of 1.R.S. regulations in this field leads to an illusion on the part of the workers that protection of benefits exist (particularly in I.R.S.qualified plans) when in fact, it does not. What the Internal Revenue Code actually does in this regard is establish the requirements by which a plan becomes eligible to receive tax benefits, as follows: 1. The plan must be in effect and must actually exist during the year for which the tax benefit is claimed. |