1. Basis for Study

The Senate Subcommittee on Labor was authorized by Senate Resolution 235, 92nd Congress, 2nd Session, to continue its study of private pension plans, with particular attention to the various cost factors which affect employers and plans. As part of this study, the Subcommittee contracted to obtain certain pension plan cost estimates from the actuarial firm of Grubbs and Company, Baltimore, Maryland. The study was made to determine the range of estimated costs to private pension plans resulting from compliance with minimum vesting requirements under several proposed minimum vesting standards. 2. Summary of Methods and Assumptions

Data was collected from actual pension plans and used to construct seven model plans distributions of employees. The distribution of employees by sex, age, years of service and rates of compensation were based directly on those for seven actual pension plans. The actual rates of termination of employment for each plan were used in the study. Assumptions were made about the plan provisions, rates of disablement, mortality, retirement age, investment return and increases in compensation. The various assumptions

used are described in detail in the report and were carefully selected to be representative of actual experience under pension plans in the United

States.

For each model distribution costs were calculated under four different

benefit formulas.

For each model and benefit formula costs were determined for plans which currently have (a) no vesting provisions, (b) a liberal

vesting provision and (c) a moderate vesting provision. For each combination costs were calculated for (a) present employees under fully funded plans,

(b) present employees under unfunded plans, and (c) new employees. And for

each of these various combinations the increase in pension plan costs was determined under four alternative minimum vesting standards.

3. Summary of Findings

Private pension plans contain endless variety. They contain variety in their plan provisions, including existing vesting provisions, in the extent of their funding, in the distributions of employees they cover by age, sex and years of service, in their rates of termination of employment of plan participants, in rates of investment return on their funds, and in many other factors. Each of these variations results in differences of costs. Thus the cost of private pension plans covers a wide range. And the increase in cost to comply with the vesting provisions of the proposed legislation also covers a wide range. The report endeavors to determine the range of those costs for the large majority of plans. There will still exist a small percentage of plans with characteristics such that they do not fall within the range of costs presented in this study.

Costs were determined under four different schedules of vesting requirements. Under the first schedule an employee would be 30% vested in his accrued pension after 8 years of service, and the vesting would increase 10% per year until 100% vesting was reached after 15 years of service. Service prior to the effective date would be counted in determining eligibility for vesting, but benefits accrued based on such past service would not be required to be vested. If such past service were not counted for eligibility, the increase in pension plan costs would initially be slightly less than those shown in the report.

The second vesting schedule is like the first, except that all past service benefits would also be subject to the vesting requirements.

The third vesting schedule is like the first, except that, for employees age 45 or over on the effective date, all past service benefits would also be subject to the vesting requirements.

but

The fourth vesting schedule is the "Rule of 50" under which an employee's accrued benefit is 50% vested when his age plus service equals 50 years, not prior to 3 years of service, and the vesting percentage increases 10% for each of the following 5 years. The Rule of 50 does not apply to past service benefits based on service prior to the effective date.

The range of increase in pension plan costs under each of the four vesting schedules is summarized in the table on page 5. The table shows costs separately for plans with no present vesting provisions, plans with moderate present vesting provisions, and plans with liberal present vesting provisions, as well as all plans combined.

23% of pension plan members are now covered under plans with no vesting prior to eligibility for early or normal retirement. The annual long term cost for most of these plans, before being amended to conform with the proposed legislation, ranges from 1.8% to 10.4% of pay. The increase in long term cost to amend these plans to conform with each of the proposed vesting schedules is shown in the top portion of the table as a percentage of payroll, and is shown in the bottom portion of the table as a percentage of the pension plan cost before amendment.

The

21% of pension plan members are now covered under pension plans with full vesting after 10 years service or less, with no age requirement. annual long term cost for most of these more liberal plans, before being amended to conform with the proposed legislation, ranges from 2.2% to 11.9%

of pay.

The remaining 56% of pension plan members are covered under plans with some moderate vesting provision, but less liberal than full vesting after 10 years service. The annual long term cost for most of these plans, before being amended to conform with the proposed legislation, ranges from 2.2% to 11.8% of pay.

Plans with liberal vesting at present have the highest present costs, but would have only a negligible increase. Plans with no vesting at present have the lowest present costs and would have the highest increase, bringing their costs up toward comparable plans with liberal vesting provisions at present.

Of those plans which do have an increase in cost, those with low turnover presently have the highest cost and would have the smallest increase. Those with high turnover have the lowest present cost and would have the largest increase, bringing them up toward the cost of comparable plans with

low turnover.

Termination rates used in this study reflect a wide range of experience, but do not reflect the results of layoffs of large numbers of employees. While such layoffs increase the cost of vested pensions, the total cost of the pension plan as a percentage of pay is usually reduced by such an event. This report presents pension plan costs as a percentage of total compensation for all plan members, and this is common practice. But it would be a mistake to think that a pension plan actually has costs for all members. Ultimately a pension plan only has costs for members who receive benefits. If a particular pension plan has indicated costs of 4.0% of total payroll, it may really have a cost averaging 6% of pay for those members who ultimately

receive a benefit and 0% of pay for employees who terminate their employment with no vested benefit. If addition of a vesting provision increases the cost of that plan from 4.0% to 4.4% of total payroll, it has done so by increasing the number of members for whom there is a cost averaging 6% (perhaps more or less for these additional members), and decreasing the number of members for whom there is a 0% cost. Thus the addition of vesting does not increase the cost for plan members for whom there is already a cost, but rather it adds a cost for members who had no cost previously.

The full findings of the study and the basis on which it was conducted are described in the report.