Reforming Private Pensions

AuthorFrank Cummings
Published date01 September 1974
Date01 September 1974
Subject MatterArticles
Reforming Private Pensions
ABSTRACT: As the recent report of the Senate Labor
Subcommittee indicates, some new, comprehensive and
humane rethinking of our overall approach to private
pensions is clearly needed. Controversy over the reform of
pension plans has focused on vesting, funding, fiduciary
standards and the prohibition of unethical conduct and
conflicts of interest in the handling of pension funds. In the
first section of this paper these issues are discussed in terms
of the current situation: the dimensions of the pension
industry, the current legal framework within which the
industry operates and the techniques of the professionals in
the field are analyzed. The issues are then discussed in
terms of the proposed pension reform bill, which is pending
before a Senate-House conference committee. A legislative
assessment of the bill concludes the paper.
Frank Cummings is a Partner in the Washington, D.C. law firm Gall, Lane and
Powell and Lecturer at Columbia Law School of Columbia University. He is also
a Public Member of the United States Labor Department’s Advisory Council on
Employee Welfare and Pension Benefit Plans. Formerly, Mr. Cummings was
Minority General Counsel of the Senate Labor and Public Welfare Committee.

T 00 few participants who work termination, under its current financial
under private pension plans
structure, less than 1/3 of accrued vested
benefits could be
paid through availa-
a pension, and too
ble pension assets. This plan started in
many who work long-ten, twenty,
1950, and the employer is funding only
twenty-five or more-years get current benefits costs.
nothing. They get nothing not as
the result of the machinations of
Case Number 2-Vesting
evil men with bad motives, but This employer is a nation-wide de-
rather as a result of badly designed partment store whose pension plan con-
plans. Many such plans either fail
tains no vesting provisions prior to
to provide reasonably attainable,
qualifying for early retirement. Early
vested, non-forfeitable interests or
retirement requirements consist of age
provide no vesting at all, even after
55 and 15 years of continuous service,
long years of work, unless the
or age 50 and 20 years of continuous
employee actually reaches retire-
service. Under the terms of plan eligi-
bility, any worker of the thousands
age under the same employer.
employed who would terminate
However, long term employment is
employment prior to attaining age 50
no longer typical, because most
will forfeit all benefits, not withstand-
Americans are, instead, mobile.
ing the number of years of employ-
Thus, as they move from job to job
they forfeit pension after pension
along the way. This constitutes the
Case Number 3-Portability
vesting side of the private pension
controversy. There is also
Mr. X
a funding
began employment for a Midwest
side: there
meat-packing company in 1927, at one
are too many plans
of the
within which the
employer’s two plants in the
pension prom-
same city. During World War II, he was
ise-even if vested-is so woe-
sent to work in the other plant in the
fully underfunded that, if the em-
city because of the need to fulfill gov-
ploying enterprise should terminate,
ernment contracts. He remained there
there might as well be no promise
until 1965 when the plant closed. The
at all.
employer would not permit him to
transfer back to the former plant as a
regular employee, but only as a casual
and intermittent laborer at the former
Listed below are some of the
plant. When the plant was closed, Mr.
X was paid a total of $231.55 for his
cases which keep turning up with
accrued pension benefits, despite 38
increasing frequency; the case his-
years of continuous employment with
tories are quoted verbatim from a
the same employer. Since he was
recent report of the Senate Labor
reemployed in his old plant as a casual
laborer, he was not eligible for any
Case Number 1-Underfunding
pension benefits after 1965. In 1970, he
was dismissed because he was overage
A large steel mill engaged in the pro-
at 65. He did not receive any pension
duction of iron and steel materials
benefits. In sum, this employee was
maintains a pension plan with total
dismissed at age 66 after 43 years of
assets of $191/2 million. However, its
continuous employment with the same
accrued vested liabilities are in excess
employer and with no benefits to him
of $66 million. In the event of plan
except $231.55, paid to him in 1965.

Had he been permitted to carry his
employee contributes his own
pension benefits and credits from both
money, he loses the tax
plants with the
same employer, which
of sections 401-404 of the code; (2)
were located a few streets apart, Mr. X
if the
would have been eligible for
employer pays, it will most
a pension.
often be discriminatory-in viola-
Case Number 4-Overfunding
tion of section 401-and thus those
This pension plan belongs to
advantages will also be
one of the
lost; (3) as
largest retail food chains in the
this year, the Internal Revenue
States. As of December 31, 1969, the
Service (IRS) is taking one more
pension plan assets’ value totaled $118
step to demolish an individual’s
million, and total accrued vested ben-
option to plan his own pension by
efits were $60 million. The plan’s charging the individual with im-
vesting requirement is age 50 and 20
mediate constructive receipt of any
years of services
compensation he elects to defer
These cases deal primarily with through use of a &dquo;salary reduction
vesting and funding-and I in-
agreement&dquo; which provides for em-
clude the subject of reinsurance as ployer contributions to a pension
an aspect of any realistic solution to
plan in the same amount as the salary
the funding problem.
reduction;3 (4) the final option open
The other side of the pension to the employee is a simple, deferred
controversy focuses on fiduciary compensation agreement without
standards and the prohibition of tax deferral for the employee, un-
unethical conduct and conflicts of less the plan is either unvested-
interest in the handling of pension which risks forfeiture-or unfunded
funds. The most notable recent -which risks nonpayment.4
case history involved the deposit of
Clearly, some new, comprehen-
vast pension reserves of the United
sive and humane rethinking of our
Mine Workers Welfare and Retire-
overall approach to private pen-
ment Fund into a noninterest-
sions is needed. There will doubt-
bearing account with
less be
a bank owned
some cost in any new
by the United Mine Workers of approach. However, we already pay
a substantial cost whenever we let
Faced with these and other
a worker retire without adequate
difficulties in obtaining real
is, the cost of wel-
curity from the private pension plan
fare and related programs, of re-
many employees have
purchasing power in a sig-
sought solutions on
an individual
segment of our economy,
basis. On occasion, devices have
and of lower morale and productiv-
been found which are of some help.
ity. Therefore, the price of pension
However, in this case the strictures
reform needs to be evaluated
of the Infernal Revenue Code are
against these other costs and in
sometimes less of a help than
terms of the benefits
it will yield.
Before getting into details of
A pension on an individual basis
legislation, however, one ought to
poses these alternatives: (1) if
examine the
current situation first.
1. U.S., Senate, Report no. 92-634, 92nd
3. U.S., Department of the Treasury,
Cong., 2nd sess., 1972, pp. 87-88.
proposed regulation, 37 Fed. Reg. 25938 (6
2. Blankenship v Boyle, 329 F. Supp.
December 1972).
1089 (D.D.C. 1971), 337 F. Supp. 296
4. Rev. Rul. 60-31, 1960-1, Cum. Bull.
(D.D.C. 1972).

Where are we now with regard to existed, in a few cases as much as 30
the dimensions of the pension in-
years. In the case of over one-fourth of
dustry, the current legal framework
all participants, attainment of age 65
within which the industry
and at least 15
years of service was
and the techniques of the profes-
required for a normal retirement ben-
sionals in the field?
3. About 13 percent of the plans
studied did
not provide for any vesting
at all. For those plans which had vest-
ing provisions expressed as a combina-
General background
tion of age and service, the combina-
tions most frequently encountered
aggregate size of private
were in the
range of from 40 to 44 years
reserves is now in excess
age with from 15 to 19 years of
$166 billion,5 with another $148
service. However, more stringent vest-
billion in public pension funds.
ing formulas were also encountered; 8
The growth of the private total has
percent of the plans had both an age
been approximately 10 percent per and a service vesting qualification
year. As far as I can tell, this
which required at least age 50 and 20
represents the largest aggregate of years of service for a vesting right. In
essentially unregulated capital in the plans where only a service re-
the nation.
quirement was established for vesting,
over one-fourth of these plans required
years ago the Senate Labor
more than 15
Subcommittee completed
years of service to qualify.
its Statis-
Among pension plans containing vest-
tical Analysis of Major Charac-
ing provisions, over 55 percent had

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