Statement For The Record
House Committee On Education And The Workforce

“Examining Cash Balance Pension Plans: Separating Myth From Fact”

I am Barbara Kennelly, President and Chief Executive Officer of the National Committee to Preserve Social Security and Medicare, and I appreciate the opportunity to submit this statement for the record. With millions of members and supporters across America, the National Committee is a grassroots advocacy and education organization devoted to the retirement security of all citizens.

The National Committee is very pleased that the Committee on Education and the Workforce is holding this hearing to examine the important policy issues involving hybrid defined benefit plans, also known as cash balance pension plans. As an organization dedicated to the retirement security of all Americans, we at the National Committee believe that the legal uncertainty currently enveloping cash balance plans is a significant retirement policy issue that Congress must address to prevent further weakening of the defined benefit pension system.

The defined benefit pension system helps millions of Americans achieve retirement security. It does this by providing employer-funded retirement income that is insured and guaranteed to last a lifetime. Employees are not typically required to make any contributions toward their benefits in these plans and investment professionals manage the assets of the plan. Moreover, employers, rather than employees, bear the investment risk of ensuring that plan assets are sufficient to pay promised benefits. Given these facts, the value of defined benefit plans to many American families is undeniable. Yet, we have seen an alarming decline in defined benefit plan sponsorship and today is a particularly precarious time for the defined benefit system.

Cash balance pension plans represent a hybrid pension model that combine features of both defined benefit and defined contribution pension plans. Cash balance plans' universal coverage and guaranteed employer contribution are the greatest strengths they bring from the world of defined benefit plans. Their ability to express benefits in the form of an account balance, and their portability, are features they draw from traditional defined contribution plans. Cash balance plans also can be more relevant to today's mobile workforce, as employees frequently change jobs before they earn significant benefits in traditional defined benefit plans. Properly designed hybrid plans that combine the best features of the defined benefit and defined contribution system can help stem the tide away from defined benefit plans.

However, conversions from traditional defined benefit plans to cash balance plans have had a negative impact on older and long-tenured employees, a group that is least able to make up for any losses because of their proximity to retirement. Workers who have spent long years earning lower benefits with the expectation that they will make up for lost ground as they near retirement age end up at a significant disadvantage when the rules are changed part-way through the process. In addition, employees at or near early retirement age can face prolonged periods of time during which they accrue no new benefits, the so-called “wear-away” period, if the value of their old plan benefit is much larger than the opening balance in the new cash balance plan. Thus, workers with long years of service who may be nearing retirement have had expected benefits reduced.

No resolution of this contentious issue would leave all parties fully satisfied. Ultimately, there must be a balance between protecting older workers from certain changes in plans and preserving employers' flexibility to make changes in a private pension system where they are not required to adopt or continue plans. It is crucial that any legislative approach combine reasonable protection for employees with reasonable flexibility for the employer.

To facilitate Congressional consideration of an appropriate framework for legislation, I offer the following policy initiatives to minimize confusion and reduce or eliminate the potentially adverse effects of cash balance plan conversions on long-tenured workers:

1. Employers should be required to provide a clear, understandable and timely disclosure of the effects of plan changes on future benefit accruals and employee choices;
2. Employers should be required to protect long-tenured plan participants benefit expectations. Providing a choice between remaining in the old plan and receiving an equivalent pension benefit under the new plan (“grandfathering”), or some comparable mechanism such as providing supplemental pay credits, interest credits or more generous opening account balances for financial losses they would otherwise incur under the new plan would achieve this goal;
3. Employers should be encouraged to retain the financial incentives for early retirement and other retirement-type subsidies that are often included in traditional defined benefit plans; and
4. Employers should be encouraged to use conversion savings to improve other employer-sponsored retirement savings or retiree health benefits programs.
5. Finally, in order to protect all workers affected by a plan conversion, Congress must give careful consideration to the appropriate interest rate companies are permitted to use as the discount rate when calculating the present value of pension benefits in a conversion.