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American Insurance Management Institute Regional Seminar, Columbus, OH, October 27, 1972
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American Insurance Management Institute Regional Seminar, Columbus, OH, October 27, 1972
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The original documents are located in Box D34, folder "American Insurance Management
Institute Regional Seminar, Columbus, OH, October 27, 1972" of the Ford Congressional
Papers: Press Secretary and Speech File at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. The Council donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Moffice Copy
REMARKS BY REP. GERALD R. FORD, R-MICH.
REPUBLICAN LEADER, U. S. HOUSE OF REPRESENTATIVES
BEFORE THE AMERICAN INSURANCE MANAGEMENT INSTITUTE
REGIONAL SEMINAR
COLUMBUS, OHIO
FRIDAY MORNING, OCTOBER 27, 1972
It is indeed a pleasure to speak here today. Insurance is a fascinating
field and also a very technical one. It's something every layman like myself
needs to have some knowledge of, and yet it's difficult for me to get among
pro's on the subject without fearing that I will be talked into buying something.
Well, I don't have to worry about that today. All of us here are on the consumer
side of the insurance business--only I'm sure you are much sharper at it than
I am. Indeed, your organization must be one of the oldest consumer interest
groups in the country.
I want to be careful that I don't lead you astray on what I came here to
speak about. I didn't come here to speak about insurance--as you deal with it
in your work-or to speak about consumerism--as we hear so much about it in the
avant garde movement of today. I'm here to talk about private employee pension
benefit plans. The debate on pension plans involves some ideas akin to insurance,
some akin to consumerism, and some which emanate from the interests and prerogatives
of management. So I wouldn't be surprised if many of you are already familiar
with the pension issues. But let me add a few more ideas that are involved in the
pension controversy. They include equity in the workplace, income adequacy of
older Americans, Federal income tax, capital formation and concentration, and, as
with many important domestic issues of today, the proper role of government
regulation vis-a-vis the private decision-making process. In fact, there is
hardly a domestic economic issue today which cannot be related in some way to our
private pension system.
There are so many facets of the pension controversy and the pension plans
themselves are so various and technically complicated that one could go on for
hours simply describing the context of the issues. But I won't do that here
because I think you already must have a good general knowledge of the subject.
In the last year or so there have been many magazine and newspaper articles and
at least two television "specials" devoted to the problems of the private pension
system. What I would like to do in the brief time available here is to describe
the President's program on pensions and the features of the two Administration
(more)
LIDRABY
Digitized from Box D34 of the Ford Congressional Papers: Press Secretary and Speech File at the Gerald R. Ford Presidential Library
-2-
bills--one of which I introduced in the House of Representatives during the
92nd Congress.
Last December 8, President Nixon outlined his pension program in a message
he sent to Congress. It is a five-point program which includes three new legis-
lative proposals, a renewed endorsement of an earlier proposal, and a major study
project which will provide the data needed to determine whether additional
legislation should be recommended. Here are the essentials of the five points:
1. Employees who wish to save independently for their retirement
or to supplement employer-financed pensions should be allowed to
deduct on their income tax returns amounts set aside for these
purposes.
Today only 30 million employes are covered by private retire-
ment plans. Now I consider this fact-that about half of the
private workforce has such coverage--to be a significant achievement
and not at all a shortcoming. Nevertheless, the non-covered and
independently covered workers should be encouraged to build up
greater savings for retirement.
Under present law, both the contributions which an employer
makes to a qualified private retirement plan on behalf of his
employees and the investment earnings on those contributions are
generally not subject to taxes until they are paid to the employee
or to his beneficiaries. The tax liability on investment earnings
is also deferred when an employee contributes to a group plan,
though in this case the contribution itself is taxable. But when
an employee saves independently for his own retirement, both his
contribution and the investment earnings on such savings are
currently subject to taxes.
This inequity discourages individual self-reliance and slows
the growth of private retirement savings. It places an unfair
burden on those employees (especially older workers) who want to
establish a pension plan or augment an employer-financed plan. To
provide such persons with the same opportunities now available to
others, the Administration bill would make contributions to
retirement savings programs by individuals deductible up to the
level of $1500 per year or 20 per cent of income, whichever is
less. Individuals would retain the power to control the investment
of these funds, channeling them into bank accounts, mutual funds,
annuity or insurance programs, government bonds, or into other
investments as they desire. Taxes would also be deferred on the
earnings from these investments.
This provision would be especially helpful to older workers
who are most interested in retirement. The limitation on
deductions would direct benefits primarily to employees with low
(more)
-3-
and moderate incomes, while preserving an incentive to establish
employer-financed plans. The limit is nevertheless sufficiently
high to permit older employees to finance a substantial retirement
income. For example, a person whose plan begins at age 40, with
contributions of $1500 a year, could still retire at age 65 with
an annual pension of $7500, in addition to social security benefits.
This proposed deduction would be available to those already
covered by employer-financed plans, but in this case the upper limit
of $1500 would be reduced to reflect pension plan contributions
made by the employer. An appropriate adjustment would also be made
in the case of individuals who do not contribute to the Social
Security system or the Railroad Retirement System.
2. Self-employed persons who invest in pension plans for themselves
and their employees should be given a more generous tax deduction
than they now receive.
Under present law, self-employed persons may establish pension
plans covering themselves and their employees. However, deductible
contributions are limited annually to $2500 or 10 per cent of earned
income, whichever is less. There are no such limits to contributions
made by corporations on behalf of their employees.
This distinction in treatment is not based on any difference in
reality, since self-employed persons and corporate employees often
engage in substantially the same economic activities. One result
of this distinction has been to create an artificial incentive for
the self-employed to incorporate; another result has been to deny
benefits to the employees of those self-employed persons who do not
wish to incorporate which are comparable to those of corporate
employees.
To achieve greater equity, the Administration bill would raise the
annual limit for deductible contributions by the self-employed to
$7500 or 15 per cent of income, whichever is less. This provision
would encourage and enable the self-employed to provide more adequate
benefits for themselves and for their workers.
3. A minimum standard should be established for the vesting of
pensions.
Inadequate vesting in pension plans is perhaps the most serious
problem in our private pension system. Conceptually, vesting means
that the benefit rights accrued by a plan participant will not be
forfeited, even if he changes jobs or stops working before normal
retirement age. When 10, 15, or 20 years of accrued pension credits
suddenly go down the drain because of a layoff, illness, or opportunity
for a better job, it is no consolation to be told that you have lost
nothing because you never gained a legal right to a pension. The
plain fact today is that, for the vast majority of plan participants,
pension expectations are built up by going to work day in and day
out, and not by hiring a lawyer and maybe also an actuary
(more)
-4-
to advise you from time to time about your status under the plan's
provisions.
More than two-thirds of all private pension plan participants
are not now vested. Of course, this figure includes large numbers of
young, short-service workers who may obtain vested rights later on
in their careers. But a disturbingly large number of older workers
are not protected by vesting:
--40 per cent of plan participants age 45 or more are not vested;
--35 per cent of plan participants age 50 or more are not vested;
--26 per cent of plan participants age 55 or more are not vested.
Pensions, by their very nature, are of greatest concern to the older
worker. Accordingly, this lack of vested rights for older workers is
critical, for they experience the greatest hardships when benefit losses
occur, and an older workers who loses benefit rights has far less
opportunity to obtain a pension from a subsequent employer than does
a younger worker.
While there is a need for some vesting--especially among older
workers--it must be recognized that a Federally-established vesting
standard would raise costs for those plans without vesting and for
those currently offering slow vesting. If these increased costs were
excessive or ill-constructed, vesting could come at the expense of
reduced future benefit payments for retirees and could discourage new
or improved pension plans. For these reasons a "Rule of 50" was
selected as a minimum standard; one which would be moderate in cost
but which would bring rapid vesting for middle-aged and older workers.
The Rule of 50 would require 50 per cent vesting whenever any
combination of age and years of plan participation equals 50, with
vesting of an additional 10 per cent each year for five years there-
after. Thus, a worker who begins to participate in a plan at age
30 would, at age 40 with 10 years of covered service, become 50 per
cent vested; a worker, age 45 with 5 years of covered service, would
also achieve 50 per cent vesting. Both would be 100 per cent vested
after 5 additional years.
To alleviate any danger that the Rule of 50 might limit new
employment opportunities for older workers and also to keep vesting
costs to a minimum, the Administration bill would allow plans to
exclude employees from coverage until they have up to three years of
service and/or attain a specified age not to exceed age 30. Also,
plans could exclude an employee who first becomes eligible when he
has attained an age which is within 5 years of the normal retirement
age under the plan. In addition, to ease the impact of increased
costs, only benefits accrued after a specified effective date would
have to be vested under the minimum standard.
These vesting and eligibility standards would be written into the
Internal Revenue Code and plans would have to adhere to them to
maintain their tax-qualified status. It is for this reason that the
(more)
-5-
Administration bill would be administered by the Treasury Department,
which has the expertise necessary for this particular job. In this
regard, the President's proposal would not disturb the primary and
appropriate role of the Treasury Department as the Federal agency
administering matters related to the tax qualification of private
pension plans.
4. Pension funds should be administered according to Federal
standards of fiduciary responsibility.
Some 125 billion dollars have been accumulated in private
pension funds to pay retirement benefits in future years. Control
of these funds is shared by employers, unions, banks, insurance
companies, and other entities. Most of this vast sum of money is
honestly and effectively managed. But over the years instances
have come to light where pension funds have been mismanaged, abused
by self-dealing, or subjected to plain wrongdoing. Because the
pension fund normally is the only security underlying benefit
expectations other than the ability of contributing employers to
continue in business, it is clear that plan participants should
have sound protection against careless and corrupt fund management.
To this end, the President asked Congress to enact the Employee
Benefits Protection Act in March 1970, and again in his pension
message of December 1971.
The EBPA would amend the existing Welfare and Pension Plans
Disclosure Act in several significant ways. Most importantly, it would
impose Federal standards of fiduciary responsibility on persons who
control pension funds (and here I might add that the standards would
apply also to managers of private employee welfare funds). These
standards basically require that plan fiduciaries discharge their
duties solely in the interests of plan participants and their
beneficiaries, and that they do so in accordance with a "prudent man"
role and the documents governing the fund. There are also some
specific prohibitions against self-dealing and conflicts of interest.
A fiduciary would be personally liable for losses caused by his
breach of the standards, and plan participants in a class action or
the Secretary of Labor could sue to recover the liability.
Other significant features of the EBPA (or "ficuciary bill," as
it is popularly called) include broadened reporting and disclosure
requirements, stronger investigatory and enforcement powers for
the Secretary of Labor, and a prohibition against persons convicted
of certain crimes from holding responsible positions in a plan. I
should note, however, that the bill would not interfere with State
laws which now regulate the insurance, banking and securities fields.
5. The Departments of Labor and the Treasury are undertaking a
one-year study to determine the extent of benefit losses which
result from plan terminations.
When a pension plan is terminated, an employee participating
(more)
-6-
in it can lose all or a part of the benefits which he has long been
relying on, even if his benefits are fully vested. The extent to
which terminations occur, the number of workers who are affected,
and the degree to which they are harmed are questions about which
we now have insufficient information. This information is needed
in order to determine what Federal policy should be on questions
such as funding, the nature of the employer's liability, and
termination insurance.
The wrong solution to the terminations problem could do more
harm than good by raising unduly the cost of pension plans for the
many workers who are not affected by terminations. It is important,
therefore, that the nature and scope of this problem be carefully
and thoroughly investigated. To this end, the President directed
the Departments of Labor and the Treasury to complete their data
collection plan on terminations by the close of 1972.
That concludes my description of the five points which comprise the
President's program on pensions. Now I would not be candid if I left you with
the impression that no other pension proposals have come to the attention of
Congress, or that there is not any controversy about what or how much should be
done. Quite the reverse is true, and it would take much more time to describe
the other proposals and compare them with the President's. Instead of doing
that, let me leave with you a general characterization of the President's program.
Basically, it regards private pension plans as valuable assets in our free enter-
prise system and seeks not to discourage their further growth and development.
Some improvements--vesting and fiduciary standards--clearly are needed to make
retirement expectations more secure. At the same time, the inequities that
exist between the covered workers and the non-covered or inadequately covered can
be remedied without the Federal Government redesigning the private retirement
structure. Finally, the program does not attempt to experiment with ideas where
basic data is needed.
Thank you for your attention. I would not be surprised if you now feel
that I came here to sell you something--well-considered, practical pension
proposals.
###
STEECH
Alla. FRIDAY, OCT. 27, 1972
REGIONAL SEMINAR, AMERICAN INSURANCE
MANAGEMENT INSTATUTE, COLUMBUS, OHIO
It. is indeed a pleasure to speak here today, Insurance is a fescina-
field and also a vory bechnical are. It's something overy 1: like
impself needs to have some knowledge of, and yet it's diffice forms to get among
proto on the subject without fearing that I will, be talked into buving SOME-
avan. 011, : Have to werry about that today. All arous to 519 on
the mericide of the insurance business- only I'm sure 594 am much sharper
#1.11 than Indeed, your organization must be one of the oldest nsumer
935 groups in the country.
I want to be careful that I don't lead you astray on what I case
here to about. I didn't come here to speak about insurance--az you deal
with it in your MA-br ti speak about consumerism--no we hear se such about
It in the avent movement of today. I'm here to talk about private em-
pension benefit plans.
he dobate on pension plans involves
akin to insurance, some siin to consumerism, and some widol extinate
the interests and prerugatives of management. So I wouldn't be surpri if
wark oflyou are
already familiar with the pension issues. But let add
a few more ideas that are involved in the pension controversy. Them nolude
in the workplace, income neequacy of older Americans, heral Income
nov, orital Formatio
incontration, are, an WILH
mentid
ss
hopey, the proper role or government regulation vid-peric the
vase scision-moking process. In fact, there is hardly a domestic economic
issue form which nannot be related in some way to cur private pension ayatam.
Phere are 50 many facets
of the pension controversy and the
pension plans themselves are so various and technically complicated that ne
could 80 on far hours simply describing the context of the issues. But
Won't do that here because I think you already must have a good teneral knowle
edre of the subject. In the last year or 50 thero have been na asing
and wapeper articles and at least bw television #speci Is" devoted t.
DERALD FORD LIBRARY
proble: of the private pension sytem. What I would like to do in the brief
Best Possible Scan from Poor Quality Original
time available here is to describe the President's program on pensions and the
features of the two Administration bills which I introduced in the House
of Representatives during the 92nd Congress.
Last December 8, President Nixon outlined his pension program in a
message he sent to Congress. It is a five-point program which includes three
new legislative proposals, a renewed endorsement of an earlier proposal, and
a major study project which will provide the data needed to determine whether
additional legislation should be recommended. Here are the essentials of the
five points:
1. Employees who wish to save independently for their retirement or to
supplement employer-financed pensions should be allowed to deduct on their
income tax returns amounts set aside for these purposes.
Today only 30 million employees are covered by private retirement plans.
Now I consider this fact-that about half of the private workforce has such
coverage--to be a significant achievement and not at all a shortcoming.
Nevertheless, the non-covered and independently covered workers should be
encouraged to build up greater savings for retirement.
Under present law, both the contributions which an employer makes to
a qualified private retirement plan on behalf of his employees and the
investment earnings on those contributions are generally not subject to
taxes until they are paid to the employee or to his beneficiaries. The
tax liability on investment earnings is also deferred when an employee
contributes to a group plan, though in this case the contribution itself
is taxable. But when an employee saves independently for his own retire-
ment, both his contribution and the investment earnins on such savings are
currently subject to taxes.
This inequity discourages individual self-reliance and slows the
growth of private retirement savings. It places an unfair burden on those
employees (especially older workers) who want to establish a pension plan
or augment an employer-financed plan. To provide such persons with the
same opportunities now available to others, the Administration bill would
make contributions to retirement savings programs by individuals deductible
up to the level of $1500 year or 20% of income, whichever is less.
Individuals would retain the power to control the investment of these
funds, channeling them into bank accounts, mutual funds, annuity or insur-
ance programs, government bonds, or into other investments as they desire.
Taxes would also be deferred on the earnings from these investments.
This provision would be especially helpful to older workers who are
most interested in retirement. The limitation on deductions would
direct benefits primarily to employees with low and moderate incomes, while
preserving an incentive to establish employer-financed plans. The limit
is nevertheless sufficiently high to permit older employees to finance a
substantial retirement income. For example, a person whose plan begins
at age 40, with contributions of $2500 = a year, could still retire at
age 65 with an annual pension of $7500, in addition to social security
benefits.
This proposed deduction would be available to those already covered
b employer-financed plans, but in this case the upper limit of $1500
would be reduced to reflect pension plan contributions made b the em-
ployer. An appropriate adjustment would also be made in the case of
individuals who do not contribute to the Social Security system or the
Railroad Retirement System:
2. Self-employed persons who invest in pension phans for themselves
and their employees should be given a more generious tax deduction than
they now receive.
Under present law, self-employed personsmay establish pension plans
covering themselves and their employees. However, deductible centribu-
tions are limited annually to $2500 or 10 percent of earned income, which
ever is less. There are no such limits to contributions made by corpora-
tions on behalf of their employees.
This distinction in treatment is not based on any difference in reality,
since self-employed persons and corporate employees often engage in sub-
stantially the same economic activities. One result of this distinction
has been to create an artificial incentive for the self-employed to incor-
porate; another result has been to deny benefits to the employees of those
self-employed persons who do not wish to incorporate which are
comparable to those of corporate employees.
To achieve greater equity, the Administration bill would raise the
annual limit for deductible contributions by the self-employed to $7500
or 15 percent of income, whichever is less. This provision would encour-
age and enable the self-employed to provide more adequate benefits for
themselves and for their workers.
3. A minimum standard should be established for the vesting of pensions.
Inadequate vesting in pension plans is perhaps the most serious prob-
len in our private pension system. Conceptually, vesting means that the
benefit rights accrued by a plan participant will not be forfeited, even
if he changes jobs on stops working before normal retirement age. When
10, 15, or 20 years of accrued pension credits suddenly go down the drain
because of a layoff, illness, or opportunity for a better job, it is no
consolation to be told that you have lost nothing because you never
gained a legal right to a pension. The plain fact today is that, for
the vast majority of plan participants, pension expectations are built
up by going to work day in and day out, and not by hiring a lawyer and
maybe also an actuary to advise you from time to time about your status
under the plan' S provisions.
More than two-thirds of all private pension plan participants are not
now vested. of course, this figure includes large numbers of ouns,
short-service workers who may obtain vested rights later on in their
careers. But a disturbingly large number of older workers are not pro-
tected by vesting:
--40 percent of plan participants age 45 or more are not vested;
--35 percent of plan participants age 50 or more are not vested;
-26 percent of plan participants age 55 or more are not vested.
Pensions, by their very nature, are of greatest concern to the older
worker. Accordingly, this lack of vested rights for older workers is
critical, for they experience the greatest hardships when benefit losses
occur, and an older worker who loses benefit rights has far less oppor-
tunity to obtain a pension from a subsequent employer than does a
younger worker.
While there is a need for some vesting--especially among older workers--
it must be recognized that a Federally-established vesting standard would
raise costs for those plans without vesting and for those currently offer-
inc slow vesting. If theme increased costs were excessive or 111-
constructed, vesting could come at the expense of reduced future benefit
payments for retirees and could discourage new or
improved pension
plans. For these reasons a "Rule of 50" was selected as a minimum
standard; one which would be moderate in cost but which would bring
rapid vesting for middle-aged and older workers.
The Pule of 50 require 50 percent vesting whenever any combination
of age and years of plan participation equals 50, with vesting of an
additional 10 percent each year for five years thereafter. Thus, a worker
who begins to participate in a plan at age 30 would, at age 40 with 10
years of covered service, become 50 percent vested; a workers, age 45 with
5 years of covered service, would also achieve 50 percent vesting. Both
would be 100 percent vested after
5 additional years.
To alleviate any danger than the Pule of 50 might limit new employ-
ment opportunities for older workers and also to keep vesting costs to a
minimum, the Administration bill would allow plans to
from coverage
exclude employees until they have up to three years of
rvice and/or attain a specified age not to exceed age 30. Also, plans
could exclude an employee who first becomes eligible when he has attained
an age which is within 5 years of the normal retirement age under the
plan. In addition, to ease the impact of increased costs, only benefits
accrued after a specified effective date
would have to be vested under
minimum standard.
These vesting and eligibility standards would be writton into the
ternal Revenue Code and plans would have to adhere to them to maintain
their tax-qualified status. It is for this reason that the Administration
bill would be administered by the Treasury Department, which has the
pertise necessary for this particular job. In this regard, the Presi-
dent's preposal would not disturb the primary and appropriate role of
Treasury Department as the Federal agency administering rs re-
lated to the tax qualification of private pension plans.
4. Pension funds should be administered according to Federal standards
of fiduciary responsibility.
Some
125
billion
dollars have been accumulated in private pension
funds to pay retirement benefits in future years. Control of these funds
is shared by employers, unions, banks, insurance companies, and other
entities. Most of this vast sum of money is honestly and effectively
managed. But over the years instances have come to light where pension
funds have been mismanaged, abused by self-dealing, or subjected to plain
wrongdoing. Because the pension fund normally is the only S ecurity
underlying benefit expectations other than the ability of contributing
e ployers to continue in business, it is clear that plan participants
should have sound protection against careless and corrupt fund tanage-
ment. To this end, the President asked Congress to enact the Employee
Benefits Protection Act in March 1970, and again in his pension message
of December 1971.
The EBPA would amend the existing Welfare and Pension Plans Dis-
closure Act in several significant ways, Most importantly, it would im-
pose Federal standards of fiduciary responsibility on persons who
control pension funds (and here I might add that the standards would apply
also to managers of private employee welfare funds). These standards
basically require that plan fiduciaries discharge their Juties solely
in he interests of plan participants and thoir beneficiaries, and that
Crey do 30 in accordance with a "prudent man" rule and the doc ments
governing the fund. There are also some specific prohibitions against
self-dealing and conflicts of interest. A fiduciary would be personally
liable for losses caused by his breach of the standards, and plan artici-
pants in a class action
or the Secretary of Labor could an to 18-
cover the liability.
Other significant features of the EBPA (or "fiduciary bill," as it
1. popularly callod) include broadoned reporting and disclosure require-
sents, stronger investigatory and enforcement powers for the Secretary of
Labor, and a prohibition against persons convicted of certain crimes from
holding responsible positions in a plan. I should note, however, that
thabill would not interfere with State laws which now regulate the insur-
ance, banking and securities fields.
5. The Departments of Labor and the Treasury are undertaking a ne-year
which result
study to determine the extent of benefit losses
from plan torminations
When a pension plan is terminated, an employee participating in it
can lose all I' a part of the benefits which he has long been relying on,
even if his
benefits are
fully vested, The extent to which terminations occur,
the number of workers who are affected, and the degree to which they are
BRARK,
armed are questions about which we now have insufficient information.
This information is needed in order to determine what Federal policy
should be on questions such as funding, the nature of the employer' S
liability, and termination insurance.
The wrong solution to the terminations problem could do more harm than
good by raising unduly the cost of pension plans for the many workers who
are not affected by terminations. It is important, therefore, that the
nature and scope of this problem be carefully and thoroughly investigated
To this end, tho Prepident directed the Departments or
Labor and the Treasury to complete their
plan
terminations
by the close of 1972.
That concludes my description of the five points which comprise
the President's program on pensions. Now I would not be candid if I
left you with the impression that no other pension proposals have come
to the attention of Congress, or that there is not any controversy about
what or how much should bedone. Quite the reverse is true, and it
would take much more time to describe the other proposals and compare
them with the President's. Instead of doing that, let me leave with you
a general characterization of the President's program. Basically, it
regards private pension plans as valuable assets in our free enterprise
system and seeks not to discourage their further growth and development.
Some improvements -- vesting and fiduciary standards - - clearly are
needed to make retirement expectations more secure. At the same time,
the inequities that exist between the covered workers and the non-covered
or inadequately covered can be remedied without the Federal Government
redesigning the private retirement structure. Finally, the program does
not attempt to experiment with ideas where basic data is needed.
FORO LIBRARY & GERALD
- 9 -
Thank you for your attention. I would not be surprised if you
now feel that I came here to sell you something -- well-considered,
practical pension proposals.
O Office Capy
REMARKS BY REP. GERALD R. FORD, R-MICH.
REPUBLICAN LEADER, U. S. HOUSE OF REPRESENTATIVES
BEFORE THE AMERICAN INSURANCE MANAGEMENT INSTITUTE
REGIONAL SEMINAR
COLUMBUS, OHIO
FRIDAY MORNING, OCTOBER 27, 1972
It is indeed a pleasure to speak here today. Insurance is a fascinating
field and also a very technical one. It's something every layman like myself
needs to have some knowledge of, and yet it's difficult for me to get among
pro's on the subject without fearing that I will be talked into buying something.
Well, I don't have to worry about that today. All of us here are on the consumer
side of the insurance business--only I'm sure you are much sharper at it than
I am. Indeed, your organization must be one of the oldest consumer interest
groups in the country.
I want to be careful that I don't lead you astray on what I came here to
speak about. I didn't come here to speak about insurance--as you deal with it
in your work--or to speak about consumerism--as we hear so much about it in the
avant garde movement of today. I'm here to talk about private employee pension
benefit plans. The debate on pension plans involves some ideas akin to insurance,
some akin to consumerism, and some which emanate from the interests and prerogatives
of management. So I wouldn't be surprised if many of you are already familiar
with the pension issues. But let me add a few more ideas that are involved in the
pension controversy. They include equity in the workplace, income adequacy of
older Americans, Federal income tax, capital formation and concentration, and, as
with many important domestic issues of today, the proper role of government
regulation vis-a-vis the private decision-making process. In fact, there is
hardly a domestic economic issue today which cannot be related in some way to our
private pension system.
There are so many facets of the pension controversy and the pension plans
themselves are so various and technically complicated that one could go on for
hours simply describing the context of the issues. But I won't do that here
because I think you already must have a good general knowledge of the subject.
In the last year or so there have been many magazine and newspaper articles and
at least two television "specials" devoted to the problems of the private pension
system. What I would like to do in the brief time available here is to describe
the President's program on pensions and the features of the two Administration
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bills--one of which I introduced in the House of Representatives during the
92nd Congress.
Last December 8, President Nixon outlined his pension program in a message
he sent to Congress. It is a five-point program which includes three new legis-
lative proposals, a renewed endorsement of an earlier proposal, and a major study
project which will provide the data needed to determine whether additional
legislation should be recommended. Here are the essentials of the five points:
1. Employees who wish to save independently for their retirement
or to supplement employer-financed pensions should be allowed to
deduct on their income tax returns amounts set aside for these
purposes.
Today only 30 million employes are covered by private retire-
ment plans. Now I consider this fact--that about half of the
private workforce has such coverage--to be a significant achievement
and not at all a shortcoming. Nevertheless, the non-covered and
independently covered workers should be encouraged to build up
greater savings for retirement.
Under present law, both the contributions which an employer
makes to a qualified private retirement plan on behalf of his
employees and the investment earnings on those contributions are
generally not subject to taxes until they are paid to the employee
or to his beneficiaries. The tax liability on investment earnings
is also deferred when an employee contributes to a group plan,
though in this case the contribution itself is taxable. But when
an employee saves independently for his own retirement, both his
contribution and the investment earnings on such savings are
currently subject to taxes.
This inequity discourages individual self-reliance and slows
the growth of private retirement savings. It places an unfair
burden on those employees (especially older workers) who want to
establish a pension plan or augment an employer-financed plan. To
provide such persons with the same opportunities now available to
others, the Administration bill would make contributions to
retirement savings programs by individuals deductible up to the
level of $1500 per year or 20 per cent of income, whichever is
less. Individuals would retain the power to control the investment
of these funds, channeling them into bank accounts, mutual funds,
annuity or insurance programs, government bonds, or into other
investments as they desire. Taxes would also be deferred on the
earnings from these investments.
This provision would be especially helpful to older workers
who are most interested in retirement. The limitation on
deductions would direct benefits primarily to employees with low
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and moderate incomes, while preserving an incentive to establish
employer-financed plans. The limit is nevertheless sufficiently
high to permit older employees to finance a substantial retirement
income. For example, a person whose plan begins at age 40, with
contributions of $1500 a year, could still retire at age 65 with
an annual pension of $7500, in addition to social security benefits.
This proposed deduction would be available to those already
covered by employer-financed plans, but in this case the upper limit
of $1500 would be reduced to reflect pension plan contributions
made by the employer. An appropriate adjustment would also be made
in the case of individuals who do not contribute to the Social
Security system or the Railroad Retirement System.
2. Self-employed persons who invest in pension plans for themselves
and their employees should be given a more generous tax deduction
than they now receive.
Under present law, self-employed persons may establish pension
plans covering themselves and their employees. However, deductible
contributions are limited annually to $2500 or 10 per cent of earned
income, whichever is less. There are no such limits to contributions
made by corporations on behalf of their employees.
This distinction in treatment is not based on any difference in
reality, since self-employed persons and corporate employees often
engage in substantially the same economic activities. One result
of this distinction has been to create an artificial incentive for
the self-employed to incorporate; another result has been to deny
benefits to the employees of those self-employed persons who do not
wish to incorporate which are comparable to those of corporate
employees.
To achieve greater equity, the Administration bill would raise the
annual limit for deductible contributions by the self-employed to
$7500 or 15 per cent of income, whichever is less. This provision
would encourage and enable the self-employed to provide more adequate
benefits for themselves and for their workers.
3. A minimum standard should be established for the vesting of
pensions.
Inadequate vesting in pension plans is perhaps the most serious
problem in our private pension system. Conceptually, vesting means
that the benefit rights accrued by a plan participant will not be
forfeited, even if he changes jobs or stops working before normal
retirement age. When 10, 15, or 20 years of accrued pension credits
suddenly go down the drain because of a layoff, illness, or opportunity
for a better job, it is no consolation to be told that you have lost
nothing because you never gained a legal right to a pension. The
plain fact today is that, for the vast majority of plan participants,
pension expectations are built up by going to work day in and day
out, and not by hiring a lawyer and maybe also an actuary
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to advise you from time to time about your status under the plan's
provisions.
More than two-thirds of all private pension plan participants
are not now vested. Of course, this figure includes large numbers of
young, short-service workers who may obtain vested rights later on
in their careers. But a disturbingly large number of older workers
are not protected by vesting:
--40 per cent of plan participants age 45 or more are not vested;
--35 per cent of plan participants age 50 or more are not vested;
--26 per cent of plan participants age 55 or more are not vested.
Pensions, by their very nature, are of greatest concern to the older
worker. Accordingly, this lack of vested rights for older workers is
critical, for they experience the greatest hardships when benefit losses
occur, and an older workers who loses benefit rights has far less
opportunity to obtain a pension from a subsequent employer than does
a younger worker.
While there is a need for some vesting--especially among older
workers--it must be recognized that a Federally-established vesting
standard would raise costs for those plans without vesting and for
those currently offering slow vesting. If these increased costs were
excessive or ill-constructed, vesting could come at the expense of
reduced future benefit payments for retirees and could discourage new
or improved pension plans. For these reasons a "Rule of 50" was
selected as a minimum standard; one which would be moderate in cost
but which would bring rapid vesting for middle-aged and older workers.
The Rule of 50 would require 50 per cent vesting whenever any
combination of age and years of plan participation equals 50, with
vesting of an additional 10 per cent each year for five years there-
after. Thus, a worker who begins to participate in a plan at age
30 would, at age 40 with 10 years of covered service, become 50 per
cent vested; a worker, age 45 with 5 years of covered service, would
also achieve 50 per cent vesting. Both would be 100 per cent vested
after 5 additional years.
To alleviate any danger that the Rule of 50 might limit new
employment opportunities for older workers and also to keep vesting
costs to a minimum, the Administration bill would allow plans to
exclude employees from coverage until they have up to three years of
service and/or attain a specified age not to exceed age 30. Also,
plans could exclude an employee who first becomes eligible when he
has attained an age which is within 5 years of the normal retirement
age under the plan. In addition, to ease the impact of increased
costs, only benefits accrued after a specified effective date would
have to be vested under the minimum standard.
These vesting and eligibility standards would be written into the
Internal Revenue Code and plans would have to adhere to them to
maintain their tax-qualified status. It is for this reason that the
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Administration bill would be administered by the Treasury Department,
which has the expertise necessary for this particular job. In this
regard, the President's proposal would not disturb the primary and
appropriate role of the Treasury Department as the Federal agency
administering matters related to the tax qualification of private
pension plans.
4. Pension funds should be administered according to Federal
standards of fiduciary responsibility.
Some 125 billion dollars have been accumulated in private
pension funds to pay retirement benefits in future years. Control
of these funds is shared by employers, unions, banks, insurance
companies, and other entities. Most of this vast sum of money is
honestly and effectively managed. But over the years instances
have come to light where pension funds have been mismanaged, abused
by self-dealing, or subjected to plain wrongdoing. Because the
pension fund normally is the only security underlying benefit
expectations other than the ability of contributing employers to
continue in business, it is clear that plan participants should
have sound protection against careless and corrupt fund management.
To this end, the President asked Congress to enact the Employee
Benefits Protection Act in March 1970, and again in his pension
message of December 1971.
The EBPA would amend the existing Welfare and Pension Plans
Disclosure Act in several significant ways. Most importantly, it would
impose Federal standards of fiduciary responsibility on persons who
control pension funds (and here I might add that the standards would
apply also to managers of private employee welfare funds). These
standards basically require that plan fiduciaries discharge their
duties solely in the interests of plan participants and their
beneficiaries, and that they do so in accordance with a "prudent man"
role and the documents governing the fund. There are also some
specific prohibitions against self-dealing and conflicts of interest.
A fiduciary would be personally liable for losses caused by his
breach of the standards, and plan participants in a class action or
the Secretary of Labor could sue to recover the liability.
Other significant features of the EBPA (or "ficuciary bill," as
it is popularly called) include broadened reporting and disclosure
requirements, stronger investigatory and enforcement powers for
the Secretary of Labor, and a prohibition against persons convicted
of certain crimes from holding responsible positions in a plan. I
should note, however, that the bill would not interfere with State
laws which now regulate the insurance, banking and securities fields.
5. The Departments of Labor and the Treasury are undertaking a
one-year study to determine the extent of behefit losses which
result from plan terminations.
When a pension plan is terminated, an employee participating
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in it can lose all or a part of the benefits which he has long been
relying on, even if his benefits are fully vested. The extent to
which terminations occur, the number of workers who are affected,
and the degree to which they are harmed are questions about which
we now have insufficient information. This information is needed
in order to determine what Federal policy should be on questions
such as funding, the nature of the employer's liability, and
termination insurance.
The wrong solution to the terminations problem could do more
harm than good by raising unduly the cost of pension plans for the
many workers who are not affected by terminations. It is important,
therefore, that the nature and scope of this problem be carefully
and thoroughly investigated. To this end, the President directed
the Departments of Labor and the Treasury to complete their data
collection plan on terminations by the close of 1972.
That concludes my description of the five points which comprise the
President's program on pensions. Now I would not be candid if I left you with
the impression that no other pension proposals have come to the attention of
Congress, or that there is not any controversy about what or how much should be
done. Quite the reverse is true, and it would take much more time to describe
the other proposals and compare them with the President's. Instead of doing
that, let me leave with you a general characterization of the President's program.
Basically, it regards private pension plans as valuable assets in our free enter-
prise system and seeks not to discourage their further growth and development.
Some improvements--vesting and fiduciary standards--clearly are needed to make
retirement expectations more secure. At the same time, the inequities that
exist between the covered workers and the non-covered or inadequately covered can
be remedied without the Federal Government redesigning the private retirement
structure. Finally, the program does not attempt to experiment with ideas where
basic data is needed.
Thank you for your attention. I would not be surprised if you now feel
that I came here to sell you something--well-considered, practical pension
proposals.
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BERALD