nct. We believe it became part of the act without full understanding of the effort and cost necessary to comply with it.

Act section 103 (d) describes the required content of the actuarial statement which shall be part of the annual report of the plan. Item (6) of the subsection calls for:

(6) The present value of all the plan's liabilities for nonforfeitable pension benefits allocated by the termination priority categories as set forth in Section 4044 of this Act, and the actuarial assumptions used in these computations. The Secretary shall establish regulations defining (for purposes of the Section) termination priority categories' and acceptable methods, including approximate methods, for allocating the plan's liabilities to such termination priority categories. [Emphasis added.] The committee reports provide no elaboration or rationale of this requirement.

The fact that the Secretary must produce definitions and approximate methods for the purposes of this section indicates that the reported amounts would exist by definition rather than by fact. Further, act section 104(a)(2) (A) provides that the Secretary may waive or modify the requirements of section 103 (d) (6) if the expense of compliance is not justified. The development of such regulations and processing of such waivers will add to the problems of overworked governmental administrative agencies.

A careful reading of act section 4044 (a) and act section 4044 (b) shows that in the general case, the allocation called for is a task of heroic proportions. It requires a 5-year look back at plan provisions, limitations on the amount of benefits, reallocations with respect to the effects of amendments during the 5-year period, and probable further reallocations caused by antidiscrimination rules of the Internal Revenue Service-regulations 1.401 (c) and Revenue Ruling 65-294 (which may require a 10-year look back at plan provisions).

All of this would require data collection and analysis, statute and plan interpretation and iterated special calculations solely for reporting purpose. It could easily triple the cost of preparation of the actuarial certificate. The complexities of the calculations are such as to make the use of approximate methods highly questionable if results are to have any meaning. And in the realm of meaning we should note that the results will generally be obsolete by the time they are published.

We do not here quarrel with the specifications of act section 4044 in the event of plan termination. But statistically plan terminations are occurrences. To impose a series of special complicated calculations on every continuing plan, regardless of its funded position, is unduly burdensome. Question has been raised as to the adequacy of the Nation's actuarial resources to cope with the requirements of ERISA. These added calculations will further strain those resources.

It should be emphasized that the calculations required by act section 103 (d) (6) are separate from and unrelated to the calculations giving rise to plan contributions, the funding standard account, the alternative funding standard and the required financial reporting under Accounting Principles Board Opinion No. 8.

We can understand that in the absence of plan termination insurance the allocation results might provide an employee participant with some information as to the security of his benefits, provided he

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fully understood the termination categories. However, the introduction of the PBGC guaranteeing insured benefits renders this detailed allocation information valueless to the individual employee participant.

Our recommendation is that the clause and sentence underlined in the above copying of act section 103 (d) (6) be deleted, and I tried to, by inflection, emphasize the underling clause and sentence.

This simple step would materially reduce the cost of maintenance of defined benefit pension plans without in any way interfering with or weakening the purposes of the Employee Retirement Income Security Act.

This statement is submitted on behalf of Mr. Bassett, Mr. Hanson, and myself. Thank you.

Mr. DENT. Thank you very kindly. Your recommendation, of course, will be given all serious consideration in executive session, when we discuss all of the recommendations that are made. I think you made a good case, Mr. Keating, and certainly, if we need to ask questions, we hope you will be free for us to call upon you for any additional information we might need.

Mr. KEATING. Yes, sir.

Mr. DENT. I have no questions.

Mr. ERLENBORN. Let's hear the whole panel.

Mr. DENT. Is anybody else going to testify?

STATEMENT OF JOHN HANSON, ACTUARY, THE WYATT CO.

Mr. HANSON. Yes. As a matter of fact, the three items that Mr. Bassett and Mr. Keating and I are testifying to are really joint statements. We discussed each of them and we have all signed our names to the three. Aside from the fiduciary responsibility section of the law, these three things we are testifying to, to me at least, seem to be the three items I can find in ERISA that simply can't be made. workable by regulation. There are other problem areas where it seems to me that regulations would solve the problem that we see.

Our purpose here is in trying to help make the law work. I would like to comment on provisions of the law with respect to the protection of accrued benefits under defined benefit plans in the event of plan mergers or predecessor plans.

The problem: The present requirements with respect to merger of assets sections 208, 1015, and 1021-protect the accrued benefits of an employee at plan merger to the extent of the assets that would be available for the employee if the plan had terminated on the merger date with the asset for such employee calculated under the detailed priority classifications called for under title IV. To maintain such employee equity after the merger, a separate asset account would apparently be needed which, however, is not permitted under title IV. These calculations for merger would be done three times, once under each plan before merger of two plans, and once again after the merged plan. Not only do these requirements with respect to merger of assets conflict with the requirements of title IV but, in addition, the determinations to be made on this basis are possible only at great administrative expense.

In fact, it is not clear that compliance with these asset merger requirements is even possible, especially in view of the certification of compliance required under title II in advance of the merger, since compliance depends on the market value of assets on the merger date. As a result, consultants are now directing their attention to means of avoiding mergers in situations that clearly call for mergers. For example, a merger of a relatively modest plan of an acquired division into a liberal plan of a large employer. These asset merger requirements are disruptive in a manner that we do not believe was intended by Congress.

Moreover, these requirements with respect to merger of assets along with the ERISA requirements regarding vesting, secs. 203, 204, and 1012, regarding service with a predecessor employer, secs. 210(b) and 1015, and regarding partial termination, sec. 4062(e), do not adequately protect employees of a division sold by one employer to another; such employees would be treated as "terminated" under the predecessor plan with the result that employees without a vested benefit would lose all accured benefits unless fund assets were allocated on their behalf on the basis of the "partial" plan termination, and even then some or all of the accrued benefits would be retained only if assets were more than adequate for all higher priority groups under the provisions of title IV.

Recommendation: Plans are merged for a variety of business reasons which generally do not signify an intent to disrupt the continued accrual of some level of pension benefits for the employees. Reconsideration of the above requirements is recommended from the viewpoint of avoiding disruption of an orderly accrual of benefits upon plan merger and to put less emphasis on the merger as a theoretical type of plan termination. We recommend that the calculation of liabilities in accordance with the plan termination priority classifications of section 4044 be required only if there is in fact a plan termination, since we believe the expense of such calculations otherwise far exceeds the value thereof, and because such expense will prevent many plan mergers that would be desirable and in accord with what we believe to be the spirit of ERISA.

Possible changes: One-Rescind the merger of asset requirements in sections 208, 1015, and 1021 which protect employees transferred between the plans on the basis of an assumed plan termination.

Two-Require that accured benefits under the plan from which an employee transfers the predecessor plan-be protected in accordance with the minimum vesting standards of section 203 and, to this end, amend ERISA to require that service under the successor plan with a successor employer be counted for eligibility purposes, but not for computing the amounts of benefits, under the predecessor plan.

The committee report discussing sections 208 and 1021 indicates that the purpose of these asset merger requirements is to protect rights of participants, and it is useful to review the consequences of the changes in ERISA suggested above. On the positive side is the improved protection of employees who are part of a unit sold to another employer. Also, without section 208, plan assets at the time of

merger would not be computed with respect to individual employees, thus eliminating the root of the conflict with the terms of title IV.

As a result, however, assets that would be applied for benefits not insured by the PBGC in the event of a pre-merger termination might be reallocated as a result of a merger to benefits insured by the PBGC, thus reducing both (a) the amounts of non-insured benefits payable in the event of a subsequent plan termination and (b) the employer liability at plan termination.

In this regard, a decrease in the assets allocable in the event of a plan termination to non-insured benefits seems to be a possibility inherent in the substantive provisions of ERISA. For example, the assets allocable to non-insured benefits at plan termination could be diluted by decreases in market values or by other experience losses, or, over 5 years, by plan amendments increasing benefits at lower pay levels or including a group of employees previously not covered under a plan.

If the possibility that a plan merger might be effected shortly before a termination for the purpose of reducing employer liability at plan termination is a problem, we note that such mergers are a reportable event to the PBGC, and we urge that any protection of PBGC financial stability be provided through title IV on the basis of recommendations from the PBGC, perhaps by increasing employer liabilities if a merger had been effected during the 5 years prior to the termination with a resultant significant decrease in the employer liability existing before the merger.

The possible problems resulting from these changes do not appear to us to be important, and they will become insignificant as soon as the PBGC insures more than basic benefits under ERISA.

That completes my testimony which is submitted on behalf of Mr. Keating, Mr. Bassett, and myself.

Mr. DENT. Mr. Bassett.

STATEMENT OF PRESTON C. BASSETT, VICE PRESIDENT AND ACTUARY, TOWERS, PERRIN, FORSTER & CROSBY

Mr. BASSETT. I am Preston C. Bassett, vice president and actuary, Towers, Perrin, Forster & Crosby, a member of the American Academy of Actuaries, as are my associates.

I would like to reemphasize a statement made by Mr. Hanson to the effect that all of the testimony that is being given by Mr. Hanson and Mr. Keating and myself, we all endorse and, in order to save time of this committee, we decided we would split up the assignments and each of us take a particular issue.

I also want to state we don't feel these are the only issues that are going to come up as we get into more and more of the details of this act. Most of the problems that actuaries are concerned with are on vesting and funding. We have not seen regulations and there are still a lot of uncertainties, but these three we see as real problem areas and we, if you are going to have corrective action, urge you to give serious consideration to the three of them.

Again, just to take a minute, I want to compliment the Labor Committee on the fine job they have done over the past 8 years in getting through this pension reform bill. No one agrees with every

provision of the bill, but I am certain that our group at least feels we are glad we have the legislation.

Mr. DENT. It is mighty nice of you. It is good to hear kind words once in a while.

Mr. BASSETT. As I say, there will be other things we think will come along, but we stick with these three for the time being. Very simply for you, I would like to see you amend title I, section 302 (b) (2) (D) to change "5 plan years" to read "30 plan years."

Now, let me give you a little explanation. You have to have background on the way we fund pension plans. One of the methods we use is called the entry age level method, which is designed to set up a level contribution, generally level percent of payroll, that will adequately fund the plan over a period of time. Because of this method of funding and the requirements of ERISA, we may reach a point where the accumulation of the fund under this method of funding would accumulate a fund in excess of the amount necessary to provide for all of the benefits that would be credited to all plan participants.

In other words, the fund would actually exceed the amount that would be necessary to provide all benefits. In order that we would not have to continue to fund above that level, you saw the wisdom of putting in what is termed an alternate minimum funding standard account, whereby once the assets were sufficient to provide all credited benefits, the company could switch from the funding standard account to this alternate minimum standard funding account, thereby reducing its contributions in the future to only those necessary for the increasing accrued benefits each year and remain on a fully funded basis.

Now, this is fine as long as we go that way, but it may occur, for example, if there is a significant amendment to the plan increasing prior service benefits, we all of a sudden become unfunded and we can no longer stay under the alternate account, because we have this large unfunded cost that occurs because of the plan amendment. We are now required to switch back and determine our contribution under the standard funding account. When you switch back, the law requires the deficit to be made up over 5 years.

Now, this can substantially increase the contribution and the cost to the company in a short period of time, so much so that in our opinion it may prohibit desirable plan amendments. That is the reason we feel that this requirement, this 5-year amortization is too stringent and will increase the cost too much. We recommend that like other amendments that allow a 30-year amortization, that this should also be funded over 30 years rather than 5 years.

Now, I realize that is technical. But to give you a quick look at figures, a company might be contributing 3 percent per year for normal cost and 3 percent for amortization of past service under the standard funding account. Once it is fully funded, it switches over to the minimum funding standard account and no longer makes past service contributions, and contributions are reduced to 3 percent of payroll, the normal cost.

Five years later, they amend the plan, updating their past service, giving further credit, and maybe it is worth 20 percent of payroll, something like that. Now, they would normally, you would think, fund the 3 percent plus the funding of the past service, but because they have to pick up a deficit under the funding standard account, I have