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 non-existent 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 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. 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 Honorable Arthur Levitt, comptroller of the State of New York: Chairman GRIFFITHS, "My personal opinion is since all of us are public employees 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 bililon in unfunded liabilities to pay 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. Veteran newsmen have been reporting that hefty pension increases are being given to public employees before the future costs of such gains are known to public officials and taxpayers. 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 the 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. If the percentage rate of coverage for private pensions is to be increased, ways must be found to encourage pension growth among the employees of small, and in some cases marginal, firms on either a group 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 self-employed who have or established 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 self-employed and their employees, and the increase 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% 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 requirements. 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. CHIGAN · LIL EXHIBIT A Trends in Corporate Wages and Salaries, Supplements, and After Tax Profits, 1946-1971 (Billions of Dollars) as Per Cent The CHAIRMAN. Our next witness is Mr. Quentin Smith, president, research department, Towers, Perrin, Forster & Crosby, Inc. STATEMENT OF CHARLES D. ROOT, JR., VICE PRESIDENT AND DI- Mr. Rooт. I am Charles D. Root, Jr., vice president and director, instead of Mr. Smith. With me is Mario Leo, manager of our research department. Mr. ROOT. Before Mr. Cummings goes, I would like to comment on a question he asked Mr. Willis concerning PB 51 of the pay board which has been superseded by regulations. We are allowed to put in 10 percent plus a 7-percent increase. That amounts to a total of about 11 percent, which is a little better than the 5 percent mentioned. The CHAIRMAN. We have your statement. Mr. Roor. You do, and all we are going to do is discuss certain parts of it. Senator JAVITS. This large number of letters; what do you want to do with those? Mr. RooT. We wanted to submit those with our testimony, because we felt the committee would be interested in the personal views of many different companies, all of them clients of ours, unsolicited letters. The CHAIRMAN. They will be very helpful in our committee file. The CHAIRMAN. That is correct, at the end of their testimony. With me is Mario Leo, manager of our research department. I have Mario has been a consultant in our Philadelphia/New York offices, becoming a year ago our director of research, and has spent 11 years of service with T.P.F. & C. Before that, he was an employee in the pension department of Prudential. We are extremely grateful for this opportunity to testify before this distinguished committee. We have submitted our statement. All we intend to do is stress certain parts of it. We are testifying first as a pension consulting firm--I think I am on sound ground when I say the oldest pension consulting firm in the Nation. Our first pension client was Union Carbide in 1917. Our second large client was Eastman Kodak in the late 1920's. Both are among our most active clients today. We are also one of the largest pension consulting organizations in the world. We have over 200 professionals, over 50 actuaries, over 400 employees involved in our consulting activities, and over 1,200 clients internationally. We have 10 offices in the United States from Boston to San Francisco, and two in Canada and three in Europe, London, Brussels, and Wiesbaden. |