Page images

in the market and when there is a takeover that is going to take place, you relish the idea because that is activity for you. You are not going to be happy to sit here and make no investments, so it is very natural if you see that it is going to take place, you want to have part of the action. You want to see investments made.

I don't know whether that is good or bad, but I think that is a fact and that is the way to look at it. You are more interested in being sure the volume of investment continues rather than the status quo. Is that an unfair observation?

Ms. TESLIK. I am not sure I understand it. We certainly are not in a position, with all the various takeover activity that takes place, to do a lot of second guessing and our interests are, in fact, long term. That is what a pension fund is. So we would have a concern that the takeover activity, that if in fact it is detrimental to the economy over the long term, that we have an interest in not having it continue.

I am not sure that we have made that conclusion, but we are ultimately the ones who are hurt more than anyone else if any kind of market activity is not healthy for the economy. So I think it would be probably an unfair characterization to say because we are investors, we don't care about the effect of those things or the bigger picture.

Chairman PICKLE. I don't think that is an accusation. I was making an observation.

MS. TESLIK. It is something funds don't realize fully yet, and there are a lot of pension funds out there that don't realize that and think they can execute their money in here and execute it out there, and that is all that matters. But there is no place for us to hide. If you are 40 percent of the market, however the market is doing affects us in a big way, and we have to care about the bigger picture issues.

I think the term, what it means to be a prudent investor, is changing. It used to be you knew well asset allocation use, you knew how to pick stocks, you knew how to pick bonds. I think a fiduciary who sticks to only those activities right now isn't doing his or her job.

Chairman PICKLE. Mr. Feldman, you represent a large company and you have heard witnesses earlier say when you do have these plan terminations, it is the participants that are really hurt, whether it is in an overfunded plan or whether it is just a normal plan or it is brought about by a leveraged buyout. I think it is pretty much recognized in most instances an employee will not get as good a pension value down the years as he has had all along if he is getting full past service credit. Some new plans might give it. It might be, but by and large it is true that benefits are lost.

Now, if that is so, wouldn't it be better for you people in the large companies to resist those possible hostile takeovers? There is a lot of money changing hands, but the net effect of a lot of these takeovers is to hurt the plan participant. Would it be better for you to oppose all hostile takeovers?

Mr. FELDMAN. Mr. Chairman, as an investor in leveraged buyout activity-I am stepping out of my CEIBA role here and I will talk about what I do in AT&T, because I am not aware of what the other 39 folks do, but we have restricted all of our leveraged

buyout-type investing, which is a very small percentage of the total assets, to managers who engage only in nonhostile takeovers. Before committing any money, we have very long and detailed discussions with them about their investment philosophy, how they go about it, how they intend to add value, and we also look back at their track record and what they have done in the past.

We have passed by a number of investors who say they don't do hostile takeovers but some might say they have come very close to doing that. So we do not think as investors that it makes good sense to support hostile activity.

Chairman PICKLE. Well, it is a complicated question, these takeovers, and many business organizations contend that it is so complicated we ought not to have any additional restrictions put on the program, just let the market take place.

If we are going to have any resolution though on the leveraged buyout question, we have got to make some compromises between the business world, and the marketplace. If it is determined that leveraged buyouts do lead to an unacceptably high level of benefit plan terminations, should this be limited through additional restrictions on leveraged buyout transactions, or should additional restrictions be placed on the use of the assets in pension plans? Any of you can make a comment on that.

Mr. Schanes.

Mr. SCHANES. Our position clearly is there should be restrictions on the use of those assets, Mr. Chairman.

I would like to say one thing about a phrase which everyone seems to accept and which I would like to at least have the Chairman think about challenging or have challenged, and that is the commonly accepted phrase "the employer takes the risk, therefore, he should take the gain." That has been a commonly accepted phrase for many, many years in the industry.

I have come to the conclusion after much contemplation, that is not the case.

Chairman PICKLE. Any of you disagree or want to comment on that?

Mr. Feldman.

Mr. FELDMAN. Yes; I think you clearly have to look at the individual circumstances of a company and somebody that is in bankruptcy is in a more difficult situation than an ongoing, viable corporation, which is by far the vast majority of those people covered by pension plans.

It is clear that under defined benefit plans we have made the promise of a certain level of benefits to our pensioners. We expect to carry that out and if the investment performance falls short, as it does from time to time, the business has to pick up the slack. So I think in that sense of a viable, ongoing organization, the investment risk is clearly on the side of the corporation.

Chairman PICKLE. Overall, I think I would observe, or at least hope, that the takeover situation will subside and that there won't be such emphasis put on it. It is my feeling that takeovers are more the new game in town for tax purposes, rather than for productivity. Then you get involved in pensions and pension funds, and, I think it is fair to say pension funds are used in these leveraged buyout situations.

All this activity is growing, and it may be more than we think, and we are trying to get some figures on that. As we go along this is going to continue-the discussion-because under present law, you can have termination and asset reversions. We know it hurts plan participants when it happens, and the question is, How do we protect them? The biggest push right now is what are we going to do regarding the pension plans that have built up excess assets, and do we allow them to continue to terminate, and can we say they can divert that money into retiree health plans?

What is the position of each one of you on using these retiree's funds, or some kind of prefunding system, for retiree health? Would you be for that prefunding activity or not?

Mr. WEIZMANN. Mr. Chairman, I would like to strongly endorse that suggestion. We feel very strongly that the assets in the pension plan or pension funds should, at least within range of options available to employers upon a termination, be able to be used to guarantee benefits which right now, quite frankly, are not funded or cannot be funded under current law.

Chairman PICKLE. Mr. Feldman.

Mr. FELDMAN. Yes, Mr. Chairman.

I would second that, speaking for AT&T, and not necessarily for CEIBA, although there is a strong body of support within the organization for something like that. I think everyone's intent is that these assets go to benefit retirees and the changes in the accounting practices plus the strong inflationary trends that have taken place in health care costs, leave all of us on the corporate side with a very large liability to deal with.

We have been blessed with 6 or 7 years of very strong markets and I think at least a little bit of astute investment management. To the extent there are legitimate surpluses in the pension plans, I think that would be an idea place for them to be directed.

Chairman PICKLE. Ms. Teslik.

MS. TESLIK. That is not an issue with which the council deals, or has any policies.

Chairman PICKLE. I understand that.

Mr. Schanes.

Mr. SCHANES. Yes. Our position would be the pension fund should honor its obligations first to the participants in the pension plan, before excess assets above those on a current basis could be used for other purposes, such as retiree health. But our first emphasis must be on the participants in the pension plan.

Mr. Weizmann answered your question with respect to terminating plans, Mr. Chairman. In that specifically AARP has a position there be an allocation of assets before there be any other diversion met. After that allocation, if it is used for retiree health benefits, that is fine to discuss.

Chairman PICKLE. If this plan is adopted, I raise the question, Is that fair to all other companies who do not have pension plans or who don't have excess funds for such reversions? There is an amount of money on hand in some of these programs where assets are built up. You could transfer those funds over into prepaid retiree health plans. Is that fair to all other companies?

Mr. SCHANES. One would have to start at the beginning, Mr. Chairman, and determine why some companies were determined to

have some type of benefit structure and others have another type of benefit structure, and whether some could afford it and some could not. That is business conditions.

I would hesitate to get back into the basic economics of this country. The fact is, however, that when the money has been set aside in pension plans by the employer, and then the pattern of investments and continual contributions as required by statute follows, the money should be used for a pension purpose. Incidentally, I would not say if they no longer has access to the excess assets, which employers are required to fund in accordance with the statutes you have enacted, and in accordance with those obligations of the employer from the moment he has established the plan, that he was caught by ERISA. The others who have not sought access to plan money have not, and that is the fact of the matter.

Mr. WEIZMANN. We fully agree with AARP as far as the matter pension obligations need to be satisfied before the benefits are transferred certainly to fund other benefits.

Where we differ, however, is in the fact that AARP and some other groups in town I think would like to see the size or the amount of assets or surplus assets severely reduced by, in fact, heightening those obligations, obligations that employers did not sign on to when they adopted the plan and maintained the plan during those years.

Chairman PICKLE. Well, I think we are getting ahead of our purpose of this particular hearing, but we have a lot of questions about how we approach this issue. I don't know that it is fair to all other companies if you divert these funds. I don't know whether it is legal to raise money for pension purposes, retirement purposes, and just divert that money over into health purposes automatically.

Mr. WEIZMANN. Mr. Chairman, if I might say, the issue with regard to retiree income really is an issue that cuts across not only just simply the fact of having dollars on hand to pay for life styles and living, but in fact, also certainly carries over into these years of retiree health.

Chairman PICKLE. The first question I think we will have to ask ourselves—I am not going to pursue this, but should the Federal Government-should we get involved in the retiree health plan and should we pre-fund them? Should we get into that business? That is the big question. There is a great temptation for this money in those excess funds to transfer it over. That would suite some companies but it sure would be disadevantageous to others. That is another issue we will be facing down the road.

Mr. Schanes, before we leave, my staff asked me to ask you the specific question about the values of the pension plan that is affected by workers when they lose out. They say active workers may not get a benefit they would expect to earn but retirees have already gotten that benefit. Is that not basically correct?

Mr. SCHANES. That essentially is the case. The retiree has received that which was promised. The active employee received a promise when the pension plan was established or when he joined that plan. Assuming the employer can continue in business he will receive a certain benefit based upon that promise. But now the employer is terminating somewhere beforehand and the anticipated benefit further on is not being provided, yes.

Chairman PICKLE. That would make a difference, wouldn't it? Mr. SCHANES. Yes sir.

Chairman PICKLE. I want to thank this panel. We appreciate your testimony and all of it will be considered by us and we will be holding further hearings on this issue, because I think we are just beginning on this overall subject.

If there are no other questions, the committee will stand adjourned.

[Whereupon, at 12:55 p.m., the hearing was adjourned.] [Submissions for the record follow:]

« PreviousContinue »