We see no reason for the Senate to consider funding or plan termination insurance legislation in the absence of sufficient information to determine what public policy should be in these areas. In fact, present information shows no need for such legislation. Furthermore, we doubt that further studies will demonstrate any changes in this situation.

In 1969, the Pension Research Council issued a funding study showing that "a very high degree of security had been reached by the 4,000 private pension plans, covering 9 million employees that had been surveyed. Pension plans which had been accumulating funds for 15 years or more had assets sufficient to cover 94 percent of all accrued benefits, and 99 percent of vested accrued benefits.

The most recent survey of employee pension funds by the State of Wisconsin for the period January 1, 1971; to May 5, 1972, shows an even more favorable picture of funding. For the 142 plans examined by the State, assets were sufficient to cover over 107 percent of vested benefit liabilities.

Additionally, the issue of mandatory funding may be somewhat academic in view of Opinion No. 8 of the Accounting Principles Board which requires the disclosure of pension plan liabilities on the corporate balance sheet.

Under current IRS regulations, there are adequate requirements for current service funding. Restrictions on prior service funding are now unnecessary in view of existing practices in managing funds. Further restrictions imposed by law would only serve to create more obstacles to pension fund operations. All evidence, such as indicated above, shows no need for any additional funding requirements. In fact even the present IRS regulations on the minimum period of funding may have had deleterious effects.

Reinsurance proposals contemplate an elaborate and potentially costly mechanism which would involve the most detailed regulation of every aspect of private pension plan operations. It would require : 1. Uniform actuarial assumptions,

2. Controlled benefit formulas,

3. Standardized plan design,

4. Standardized vesting,

5. Detailed restrictions on investments, with a consequent serious loss to the whole economy.

It is important to point out that this kind of program would try to insure nonexistent assets. This is distinctly different from an FDIC. type arrangement which insures deposited funds or savings. It is questionable whether pension insurance for unfunded liabilities is a workable plan. Certainly, it would require the most stringent and complex regulation imaginable.

Furthermore, a program of reinsurance to cover unfunded liabilities would in the long run result in inadequate funding. Sound plans would be financing unsound plans, and this would result in the loss of benefits to the employees in sound plans.

As to portability, sound vesting in all private pension plans will effectively meet the needs in this area. In other words, adequate vesting makes the question of portability academic. Portability would increase administrative costs. Additionally, investment yields in current plans would be less because of necessary changes in investment practices. This would lead to smaller retirement benefits.

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There are certain other areas of concern we would like to point out. We realize that your subcommittee has not completed its study and that further reports may be issued. We suggest that the subcommittee may wish to consider, if it has not already done so, the following related areas of concern.

Public pensions. In 1970 during hearings on investment policies of pension funds held by the Subcommittee on Fiscal Policy of the Joint Economic Committee, Chairman Martha W. Griffiths said, during a colloquy with Hon. Arthur Levitt, comptroller of the State of New York:

Chairman GRIFFITHS. My personal opinion is since all of us are public em ployees that the day is going to come when the next revolution is going to be those who are going to oppose the payment for a favored group of public employees of such tremendous pensions that are so much greater than anything they will ever get themselves and that is true whether we are Congressmen or Comptrollers or Presidents or whatever. I feel that this is one of the great burdens that is being borne by American society.

Mrs. Griffiths also thinks the cost of public employee pensions is one of the things that is destroying America's cities.

On February 9, Senator John C. Stennis, chairman of the Armed Services Committee, said of military retirement:

We cannot continue indefinitely retiring men in their middle and late forties at the prime of their experience and hope to have any retirement system within reasonable cost bounds.

On public employee pension problems in New York City, the New York Times editorialized:

City officials have done a poor job of safeguarding the taxpayers' interest in the pension field and the state's help is necessary to protect them against some of the consequences of their own folly.

The retirement fund for Federal civil employees has unfunded liabilities estimated to be $65 to $85 billion. Senator Stennis estimates the unfunded liability for retired military pay at $129 billion. Disregarding current costs to maintain these two Federal retirement funds, future taxpayers will have about $200 billion in unfunded liabilities off-that is about $1,000 for every American man, woman and child. No one seems to know what the figure is if you add unfunded liabilities of State and local public employee funds.

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Comments such as these from Members of Congress and the media have caused some people to wonder whether it is public employee pensions, not private pensions, that need reform.

Your subcommittee may wish to consider this problem.

All individuals should be encouraged during their working lives to build private retirement income out of earnings either on an individual or group basis. Further, individuals should be permitted to exercise maximum freedom of choice in the selection of savings and investment media for such retirement planning. Therefore, the chamber does in general support proposals that would provide income tax deferral for employees who defer income for their retirement, and that would increase the present tax deferral available to the self-employed who have or establish pension plans.

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If the percentage rate of coverage for private pensions is to be increased, ways must be found to encourage pension growth among employees of small, and in some cases marginal, firms on either a group

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or individual basis, among the self-employed, and among individuals whose employers have no pension or profit-sharing plans.

In general, we support the provisions of sections 3 and 4 of S. 3012, the Individual Retirement Benefits Act. They will encourage individual employees, not covered by employer plans, to establish retirement plans of their own choice and to save for their retirement. They will also help many employees covered by employer plans to increase the amount of their retirement income through their individual savings. Under section 4, the present tax deferral available to the selfemployed who have or establish pension plans would be increased. Encouragement here is of critical importance since it is estimated that 15 to 20 million working Americans could be benefited, and the majority of these individuals do not have H.R. 10 coverage. This is a step in the right direction. It will lead to more pensions for the selfemployed and their employees, and the increased deferral will mean larger pensions and more adequate retirement income for this large group of Americans.

Inflation, of course, is the real thief of pension values. A 6-percent rate of inflation will destroy $420 million of the purchasing power of the current $7 billion a year in private pension retirement benefits. Successful efforts by Congress and the administration to control inflation will directly and immediately help all Americans who are retired and living on fixed incomes, as well as working Americans who are looking forward to retirement.

Your subcommittee may wish to consider this problem of inflation in relation to your study of helping to provide adequate income through private pension plans.

Now in summary, maximum encouragement should be given to continued growth and expansion of private pension plans. Governmental restrictions which would hamper such growth and expansion should be avoided. Employers and employees should remain free to work out pension plan arrangements best suited to their own needs and require

ments.

In addition, all individuals should be encouraged during their working lives to build private retirement income out of earnings either on an individual basis or group basis. Individuals should be permitted to exercise maximum freedom of choice in the selection of savings and investment media for personal or group retirement planning.

We support the highest standards of honesty in the administration of employee benefit funds. Therefore, we support suitable amendments to the Welfare and Pension Plan Disclosure Act, including some form of Federal fiduciary responsibility act for pension and welfare plan administrators and trustees. We hope your subcommittee will give priority to such legislation to assure that plan participants and their beneficiaries are protected against possible dishonesty.

We support reasonable minimum Federal standards or regulation governing the vesting of private pensions. Such legislation should be accomplished through amendment of the Internal Revenue Code, as a condition for qualifying a plan.

We oppose provisions of bills, such as S. 3598, that would create a new Federal agency or office to regulate private pension plans and their assets, and that would impose new Federal funding, insurance, or portability requirements on private pension plans and their assets.

Finally, any pension legislation, rather than imposing restrictive regulation, should encourage private pension growth so that our citizens will have adequate retirement income.

Thank you, sir.

The CHAIRMAN. Thank you very much, Mr. Willis. We appreciate very much your statement.

Let me first say that your concern expressed about and directed to public pensions is shared here by members of the committee that introduced this legislation. As a matter of fact, the bill that Senator Javits and I sponsor together with other members has a title I study directed to the Secretary, and included in that study is the requirement that the Secretary look into the problem of benefit protection in pension plans covering State and municipal employees.

Mr. WILLIS. Very encouraging.

The CHAIRMAN. We share your concern. Your concern is eloquently expressed by Martha Griffiths, who appeared here as one of our wit

nesses.

You suggest the continuing availability of the chamber of com merce staff to work with our staff, and there is an area in which I suggest there might be some fruitful discussions concerning your feelings about the reinsurance provisions here.

On page 8 of your statement you list five points that you suggest the reinsurance proposals contemplated would require. I believe there should be greater communication on this. I do not believe that all of those points are a part of our design for an insurance program.

Mr. WILLIS. We would be happy to work with the committee any time on this or any other aspects.

I might say that I think in order to make insurance work, it would require a lot of rule establishment, so if there were to be such a thing as insurance, termination insurance, to make it work would require pretty well set up rules and regulations; otherwise the rules or the program would be bypassed by some unscrupulous people.

The CHAIRMAN. That really lends itself to rather deep and penetrat ing discussion, because obviously the insurance principles are a little too much to discuss right here and now. I do not believe that rigidity you mention is a necessary consequence of our bill.

Mr. WILLIS. Well, I have seen so many ways that pension funds can be valued and different actuarial bases used-nothing wrong with them, but varied that I think unless the rules are set up rigidly there would be some problems. We would be happy to work with you, in any

event.

Mr. CUMMINGS. Mr. Willis, first I would like to apologize for Senator Javits not being here this morning. He wanted to be. He is on his way down from New York. I know he would have wanted to thank the chamber for the assistance that they gave our staff back in 1966 when we were drafting the first of these pension bills.

We did not agree on an awful lot of things, but they certainly put totogether a task force for us and helped us a great deal in technical

matters.

In your statement, on page 8, you refer to the Internal Revenue Service rules or regulations under sections 401 and 404 of the Internal Revenue Code as imposing sufficient requirements to assure adequate funding and vesting of private pension plans.

Would you correct me if I am wrong, that under the present system required by the Internal Revenue Code, funding is required only of current service costs, interest on past service liabilities, so that in effect you never have to amortize an initial debt of a pension plan; am I correct on that?

Mr. WILLIS. That is right. Of course the funding that goes on in past service area

Mr. CUMMINGS. Completely voluntary.

Mr. WILLIS. Voluntary, but the practices have been quite satisfactory; and if the interest builds up into such a large factor, then the plan will have to fund anyway.

Mr. CUMMINGS. If you set up a pension plan in which you give 40 years of past service credit which creates initial unfunded liability of millions of dollars

Mr. WILLIS. I know it will. We have done it.

Mr. CUMMINGS. Under existing regulations, you can maintain that deficit literally forever?

Mr. WILLIS. That is right.

That has not been true in most of the plans.

Mr. CUMMINGS. Not in most. But it is permissible.

As to vesting, existing IRS regulations, with a few minor exceptions, require no vesting until actual retirement. Thus, for example, we have the practice of permitting a man to start at the age of 20 and work to the age of 64 years 11 months and 29 days, and if, for any reason, he loses his job, not being vested because he did not reach the age of 65, you and I would agree that that is not necessarily a desirable practice, but as far as the IRS regulation is concerned, that is completely permissible. Am I correct?

well,

Mr. WILLIS. NOW I think you are on another subject, Mr. Cummings. On vesting we support some regulation of vesting. We are pointing out here that the IRS regulations cover funding, which is another problem.

Mr. CUMMINGS. I have an exchange of correspondence with Isadore Goodman, Chief of Pension Trust Branch of Internal Revenue Service, setting forth in detail what the current IRS rules are on vesting and funding and respectfully request that that be put in the record. The CHAIRMAN. Good.

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