Page images
PDF
EPUB

strengthened. Parenthetically, I might mention that I am privileged to serve currently on the Advisory Council on Social Security, which is conducting an in-depth review of the Social Security System.

This morning, however, my remarks will be focused on only one of these three sources of retirement income-private pensions. I believe that if they are to continue to play an important role in supplying retirement income, it would be very desirable not to regulate and control them in such manner that their growth and vigor would be impaired.

PURPOSE AND NATURE OF PENSION PLANS OF INDIVIDUAL EMPLOYERS

The primary purpose of pension plans was and still is—to permit longer-service superannuated as well as disabled employes to retire in a dignified, mutually acceptable way. The extent to which employes qualify for a group benefit in the form of a pension as well as for individual compensation in the form of wages or salary, is determined through employer-employe relationships.

In addition to providing ever-larger benefits upon normal retirement, most pension plans have evolved over the years to provide other types of retirement benefits. For example, in U.S. Steel, there have been numerous improvements and additions that have substantially increased the level of pension benefits, have broadened the conditions under which an employe can retire, and have provided vested rights for employes meeting certain requirements. The level of pension benefits for any individual employe is work-related-that is, it is directly related to his length of service and to his earnings, subject to certain minimums.

A corollary reason for companies having pension plans-and one which has grown in importance during recent years-is to attract and retain capable employes. Just as employers compete on other aspects of compensation for competent employes, so also do they compete in terms of pensions. Pensions differ from regular wages or salaries, however, in two important respects: First, they are deferred until some later date and, second, they are payable only to those who then qualify. Generally, receipt of a pension is contingent upon the employe meeting age and service conditions and thus in no way is granted to employes as a matter of social right or as a gift.

Although pensions differ from regular wages or salaries, they are similar to other types of group benefits where certain requirements must also be met before the individual receives a benefit-for example, supplemental unmployment benefit plans, which are financed on a group basis, pay weekly benefits to individuals only when laid off, when unable to find other work, and when other conditions are

met.

Since pensions are only one part of the total employment package, employes and their employer can and frequently do decide to put greater emphasis on other aspects of the employment package, such as current wages. To attract and retain qualified employes, companies without any pension plan frequently must pay higher wages—

or offer better employee benefits of some other nature-than their competitiors who have such a plan. In a free society, the right to decide on the content of the total employment package should continue to reside with the employer and his employes.

Pension plans-responsive to the needs and desires of individual employes and employers-provide a flexibility in approach and covrage which could not be provided by Social Security on a practical basis. This tailor-made characteristic of pension plans continues to be an important reason for preserving and strengthening the private pension system.

Most pension plans involve a promise to pay specified benefits to employes or to their beneficiaries who become qualified to receive such benefits under the terms of the pension plan. Since the payment of full benefits rests on the continued successful operation of the employer and his pension plan, in my view it is clearly not the responsibility of Government to determine what benefits the employer and the employe should agree upon any more than to determine what wages should be paid. Such benefits should be based on the specific needs and desires of the employes covered by the pension plan, with due regard for the employer's own interests. In the steel industry, for example, employes and their employers have voluntarily negotiated types of benefits which recognize and encompass the employment characteristics and conditions of steel operations.

Just as it is not the responsibility of Government to determine benefits, neither should it be their responsibility to specify the form of pension fund investments. This would mean that pension funds should not be forced to invest a given portion of their assets in projects primarily aimed at social betterment-such as mortgages on low-income housing. While few would argue against "social betterment," motherhood, or country, such an investment requirement would penalize pension funds and their participants if they were forced to accept less attractive investment opportunities. Pension funds and their participants thus could be required involuntarily to subsidize other segments of our society.

Despite much which has been written as to the nature of private pension plans, considerable misunderstanding apparently still exists about the funding methods and their tax status. Funding of past service pension costs-that is, those costs which arise retroactively when credit is granted for service before adoption or improvement of a pension plan-is done over a period of many years because of the magnitude of the expense. In U.S. Steel's case, for example, the change in our pension plan following the 1968 labor negotiations resulted in an increase in unfunded past service obligations of some two-thirds. Because of retroactive costs, it cannot be expected that pension plans in all cases will have sufficient funds to pay full benefits if a plan is discontinued prior to full funding of these past service costs.

Further, individuals in a group covered by a pension plan become eligible for benefits when they qualify under the plan's requirements, including age and service. This means that funding is likewise on a group basis, which takes into account turnover and deaths of em

ployes who will not become eligible for benefits under the pension plan. Thus, because pensions are a form of group benefits, monies are not set aside in individual accounts for employes. Employes in the group or their beneficiaries who do not qualify for pensions may well be eligible, of course, for other termination benefits such as severance payments or group life insurance.

As to the tax aspects of private pension plans, some have claimed that private pension funds are subsidized by Government. An employer's funding of pension costs is simply another ordinary and necessary cost of doing business and is therefore deductible when payment is made to a tax-qualified trust. It must be recognized, of course, that the assets of the trust must be used exclusively for the benefit of employes or their beneficiaries; they cannot revert to the company until all pension obligations are met.

Further, pension benefits paid to a pensioner are taxable at time of receipt since only then is he the recipient of spendable-and taxable-cash income. It is true that when he retires, his income bracket is generally lower; but this situation in no way obviates the cardinal principle of income taxation-namely, that a tax is not incurred until income is realized. As to a qualified pension trust fund itself, employer contributions to the fund and its earnings are not taxable to the fund, but instead are taxable when paid to the employes in the form of benefits.

All of these pension taxation arrangements are not a matter of tax exemption, but rather a matter of tax timing. I fail to see any subsidy in these arrangements.

STATUS OF PRIVATE PENSION PLANS

Having mentioned the general purpose and nature of private pension plans, I would next like to look at the current status of such plans. Private pension plans significantly contribute to the retirement security of millions of Americans. Approximately 30 million people are now covered by such plans, and projections indicate that. 42 million people will be covered in about another decade. Assets of pension funds now approximate $125 billion. During the 1960's, they grew an average of about $8 billion annually. This funding is necessary for the protection and security of participants.

This $125 billion, as well as the $8 billion average annual increase in pension funding, is not money "taken out of the economy." Rather it is a source of investment capital needed for the creation and preservation of the job-creating and job-sustaining tools of production. As U.S. Steel stated in its 1969 Annual Report, "Only as the Nation's tools of production are kept sufficient and efficient can the Nation enjoy economic progress with a rising standard of living and survive in a position of leadership in a troubled world."

POLICIES WHICH CAN FOSTER CONTINUED GROWTH
AND DEVELOPMENT OF PRIVATE PENSION PLANS

The growth and development of private pension plans in the past suggests that the right climate can foster their growth and develop

47-752-70-52

ment in the future. Under this climate, private pension plans can continue to be an important source of retirement income and of capital. Some of the time-proven policies which can contribute to continued growth include the following:

First, government recognition that employers and employees should determine the nature and content of pension provisions.

Second, government encouragement of adequate funding through realistic tax policy.

Third, responsible management by a fiduciary who in all respects administers and invests the funds for the sole benefit of pension plan participants and who acts as a prudent man familiar with such matters would act in similar circumstances and capacity. U.S. Steel, and I believe other pension fund managements for the most part, have followed these practices. U.S. Steel also has maintained à diversified investment portfolio, with no equity securities of the employing companies as a part of the portfolio. Not more than 5% of its assets are invested in any one company. We also have annual examinations of the pension funds by a certified public accountant and periodic reviews and actuarial valuations by an independent professional actuary.

Fourth, meaningful and understandable disclosure of pension plan operations and funding. Disclosure to employes involves transmitting a simplified description of the plan to each participant or beneficiary, as well as periodic summarized financial reports. Each individual should be informed upon request as to the extent if any of his vested rights in the pension plan and when he will become entitled to vested rights if he is not already so entitled. Each individual with a right to receive a benefit should be so informed upon termination of employment. This information should indicate the nature and amount of the benefits to which he is entitled and what procedures must be followed to secure his benefits. All of this information should minimize any misunderstanding by employes as to their pension rights. U.S. Steel, for example, already discloses or makes available all of this information to its employees.

U.S. Steel's disclosure of the investment portfolio is included in its annual report to stockholders and shows classes or categories of assets and also details any investments in the company's own securities, as well as the securities of any of its subsidiaries or affiliated companies. In addition, a summary of receipts and disbursements by the fund is given. Such annual disclosure has been a part of its annual report for some 15 years.

Fifth, funding of pension plan costs on a basis which will reasonably assure assets which are adequate to meet pension promises. In U.S. Steel's case, assets of our pension fund at December 31, 1969, more than covered the actuarially computed value of vested benefits, even though some of these benefits recently adopted recognize all past service and will be funded over future years.

Some of the current legislative proposals are extensions of these concepts and of present law, and I believe the principles of the following provisions embodied therein would further the protection of participants without inhibiting the growth and development of these plans:

1. Establishment of a Federal standard for fiduciary responsibility. 2. Requirement for an annual audit of pension funds by an independent certified or licensed public accountant.

3. Disclosure of all party-in-interest transactions.

4. Disclosure of the status of funding of vested obligations.

5. Disclosure to employees of their rights and privileges under the plan.

6. Improvement of enforcement procedures.

7. Disclosure of the actuarial assumptions used in pension funding. 8. Prohibitions against persons convicted of certain crimes from serving as fiduciaries.

UNFAVORABLE ASPECTS OF PROPOSED PENSION LEGISLATION

Having mentioned various policies and legislative proposals which can foster the continued growth and development of private pension plans, let me now turn to certain of the current proposals which I believe would tend to have the opposite effect.

DETAILED DISCLOSURE OF INVESTMENT PORTFOLIO

In my judgment, most pension funds are already soundly managed. Considerable reporting is already required. Because of these factors, it would be undesirable to burden all pension plans with unnecessary additional reporting of the investment portfolio-which would be costly both to the employer and to the government, without extending greater protection or benefit to the participants. It would be preferable instead to focus on those plans where there is a reasonable cause to believe need for further action exists. Since the Securities and Exchange Commission already receives quarterly reports from pension funds and since it is a specialized agency dealing with securities markets, this would be the most appropriate agency to conduct further investigation in those cases involving investment matters where reasonable cause exists.

It seems to me that the fundamental questions of importance in the protection of the employees are: "How is the pension fund performing overall? Does it have a balanced portfolio which is yielding satisfactory earnings?" In my judgment, the information contained in the present D-2 report provides the basis for answering these two questions.

Detailed disclosure of a pension fund portfolio would only provide a means of after-the-fact second guessing about investment decisions, and this certainly would be of no help to anybody-in fact, it might even prove to be quite harmful. For example, disclosure of appreciation in the investment portfolio would undoubtedly generate comparative studies of pension fund performance. This could create pressures on pension fund managers to maximize short-term performance results, at the expense of sounder long-term investment opportunities; during recent months, the adverse results of this emphasis on short-term performance have been apparent among many mutual and other funds. On the other hand, such disclosure might make some pension fund managers invest in those securities which they think would make them least susceptible to criticism by the

« PreviousContinue »