not retiring on a pension under the general plan) is entitled to receive a lump sum severance payment which is larger than the present day value of the pension to which such employee would be entitled at age 65 under the general plan, assuming that the general plan provided for 100 percent vesting upon completion of 5 years' service. Said another way, the amount of severance compensation paid in the typical case, if deposited in a savings bank account earning 512 percent interest, would provide annual retirement income at age 65 in excess of the amount of the pension benefit accrued under the general plan prior to termination of service with the company.

Clearly, to the average terminated company employee, the right to severance compensation is more valuable than the right to a vested pension. This conclusion is further evidenced by the fact that a number of retiring employees who were eligible for pension have actually elected to waive their pension rights in order to qualify for severance compensation, an option which is available to all union employees.

Turning to the matter of funding, the company's independent consulting actuaries have estimated the amount of unfunded prior service pension cost at $365.2 million as of June 30, 1970. From the plan's inception until 1955, pensions were paid on a pay-as-you-go basis. In 1955 we inaugurated a prefunding plan under which amounts equal to 50 percent of normal cost plus an amount representing interest on 50 percent of the present value of unfunded prior service costs were paid into the trust fund. Under the funding plan, the initial unfunded prior service cost amounted to $86.8 million. During the period from 1955 to 1968, additional unfunded prior service costs of $39.6 million were established as a result of plan improvements: $3.6 million because of bridging of breaks in continuous service, and $36 million from the gradual reduction of the social security offset provision. In addition, there was an increase of $16.3 million as a result of changes in actuarial assumptions.

In view of mounting unfunded accruals under the funding plan, the company changed its policy and in July 1959, the management changed and commenced payment into the trust fund of an amount equal to 100 percent of normal cost plus interest on 100 percent of the present value of unfunded prior service costs. As a consequence of this change, a further increase in unfunded prior service cost in an amount equal to $192.2 million resulted. Finally, in 1969, an increase of $30.3 million resulted from the elimination of the social security offset.

The $365 million amount as of June 30, 1970, therefore, is the sum of the initial prior service cost of $86.8 million plus additional amounts of $192.2 million for the change to 100-percent funding; $16.3 million because of a revision in actuarial assumptions; and $69.9 million because of benefit improvements. As a result of the change in policy, a ceiling has been placed on the unfunded prior service costs, assuming the absence of any further substantial benefit improvements.

Some interesting statistics were used by the subcommittee staff in pointing to the fact that our unfunded accrual was equivalent to 42 percent of the company's assets. Actually, as a result of a continuing expansion of the company, the frozen unfunded prior service cost of $365 million now bears a relationship of 33.9 percent to company assets. With an increase from our present conservative 4-percent interest as

sumption, to a rate of 6 percent, the unfunded prior service cost could be immediately reduced to $275 million, or about 27 percent of the company's assets.

More significant, however, is the fact that the balance in the trust fund has increased from $3.1 million at the end of 1955 to $50.6 million at the end of 1970. During the same period, pension payments amounting to about $200 million were paid to our retired employees. Between 1955 and June 1971, the relationship of the fund balance to liabilities has improved to where the fund represents 14.6 percent of the unfunded prior service cost as compared to 1.1 percent in 1955.

Moreover, on the basis of the relatively conservative interest assumption used in our actuarial determinations, we believe there is a good possibility that the assets in the trust fund will continue to grow at an average rate in excess of the assumed rate of 4 percent. This increased rate could be used to help liquidate the prior service cost in future years. For example, assuming a growth rate of 6 percent and no change. in the company's annual rate of contribution to the trust, the liquidation could take place in as short a span as 35 years.

One other point should be noted: The company, being common carrier, is subject to regulation by the Federal Communications Commission. Under current FCC rules, all direct pension payments to retirees and all contributions to a pension trust fund are included in the company's cost of service for ratemaking purposes. Increases in pension costs, whether through reinsurance costs, increased benefits or other changes which require an increase in the amount of funding become, in effect, a direct additional cost to the rate payer. As a result, the FCC has promulgated extensive reporting requirements to facilitate continuing regulatory surveillance over the pension plans and related trusts of common carriers.

Included in these reports are data relating to changes in the funding instruments, the composition of the trust fund, and its relationship to actuarial liabilities, contributions to the fund, analysis of pensions paid and detailed information regarding other benefits and pensions paid.

Various proposals for pension legislation would prescribe, among other things, vesting provisions, funding of prior service costs, and reinsurance of unfunded prior service accruals for all private pension plans. I would like to comment briefly on the position of the company with respect to these features.

As demonstrated by the size and scope of our pension program commitment, the company believes strongly in the principle of an adequate, total compensation program which meets the needs and aspirations of its employees. The company is a labor intensive company as evidenced by the fact that 50 cents out of every revenue dollar goes to pay for salaries and wages or other employee-related benefits, including pensions. And we recognize that if we are going to continue to be a viable business enterprise-and we have every intention of doing that we are going to have to continue to meet the needs of our employees, just as we have for the past 120 years during which we have been in business.

Accordingly, to the extent that these proposals which are currently being considered have the effect of strengthening our employee bene

fit program, we would support them in principle. The real question for the Western Union Telegraph Co. is whether these proposals would strengthen our program or whether, in the long run, they would create more problems for our employees than they would solve.

To be specific, about 48 percent of our employees are presently associated with the business of handling telegrams which service represents about 28 percent of the company's current revenues. It is a fact, both here and abroad, that the usage of the telegram service has declined steadily over the past 20 years as customers have switched their record communication requirements to Telex, TWX, the recently introduced Mailgram, and other more modern services. This shift to the automated services has been in part caused by the rising price of the labor-intensive telegram. Adding to the cost of this service would require further rate increases which would only accelerate the decline. of the telegram, thus costing many of our employees their jobs.

Further, one fact is inescapable: The company will continue to meet its pension obligations as long as it is in business. But, if these obligations should become so large, or if the constraints placed upon our flexibility in managing our resources to meet such obligations should become so acute that they jeopardize the viability of the enterprise, then no amount of vesting and funding legislation will substitute for the pension dollars which can no longer be paid because there are no corporate earnings to fund the obligations.

The company's employees have been represented by strong national collective bargaining agents for almost 30 years. Our total compensation package, of which the pension program is a single element, is the product of negotiations between the company and its employees. The elements of this package, of course, vary from the elements of other corporate compensation programs. It is likely that if we were starting today from scratch we would attempt to negotiate different approaches in certain benefit areas.

Nevertheless, the program which we have is a mature program which has served the needs of our employees well throughout the years. I have previously referred to the severance pay benefit situation at the company. Our most recent contract settlement resulted in substantial improvements in the level of severance pay. It would not have been possible for the company both to grant these improvements and to increase its contribution toward the cost of pensions. The fact is that our unions have never requested either vesting or funding.

The first problem then with the current proposals is that they will mandate or prescribe a portion of an employer's compensation program, thus removing from management and labor the flexibility they need to shape the available fiscal resources to the total employee requirements.

Because of the way individual companies have spent their available benefit dollars. the impact of such legislation will vary considerably. For instance, the company spends about 11.4 percent of its payroll dollars on pensions as compared with 6.8 percent for all public utilities and 3.3 percent for all manufacturing, as shown in the U.S. Chamber of Commerce employee benefit study of 1970. Similarly, the percentage of the payroll dollar spent by the company on severance pay was about three times greater than that spent by these two industry

groups. I should add here thaat between 1955 and 1970, our company paid out a total of $7 million in severance pay payments.

The second problem with the current proposals from the point of view of the company is that they will impose a heavy cost burden. We estimate that the combined effect of vesting, funding, and reinsurance proposals of the type presently under consideration before this subcommittee would be to increase the company's annual pension costs by a minimum of 25 percent. For example, we estimate that the addition to the general plan of a provision for 50 percent vesting after 5 years, increased to 100 percent vesting after 15 years, would cost in excess of $600,000 annually. The increase in contribution for funding the current $365 million unfunded prior service cost over a 40-year period would be $3.8 million annually. Reinsurance of this prior service cost at an annual premium of 0.6 percent would add another $2.2 million.

To require the company to assume this burden when it would be most difficult-if not impossible-to negotiate compensating reductions in other elements of its wage and benefit program is not only unfair, but in the long run could adversely affect public interest. Let us not forget that in the final analysis the only source of payment for improved wages and benefits is corporate earnings.

In summary, Western Union does not oppose funding or vesting in concept; however, because the various proposals ignore the fact that pensions are but a single element in the total benefit package and because of Western Union's unique history, we do oppose legislation mandating these changes at this time. The effect of such legislation would be to remove from management the flexibility it needs to manage its fiscal resources in response to the compensation and benefit requirements of its own group of employees. Particularly critical, in our case, is the fact that we are, so to speak, locked into an extremely expensive matured wage-benefit pattern and the company cannot unilaterally adjust that pattern because a high proportion of wage-benefit costs are subject to collective bargaining.

Because the proposed legislation, in essence, would establish new levels of greatly increased costs, any future improvements in our plan and total benefit program will be most difficult to realize. Further, since such costs are passed on to the rate paying public, any sudden substantial increase therein could very well be contrary to the public interest. Mandating such increased costs by statute, obviously, would remove such public interest questions from the consideration of the FCC, the company, and the employees' representatives. (Information supplied for the record follows:)

EXHIBIT 1

COMPARISON OF SEVERANCE PAY BENEFITS AND

VALUES OF VESTED PENSIONS PAYABLE AT AGE 65

The following table sets forth a comparison of the

discounted value of a deferred "vested pension" commencing at age 65 and some typical severance benefits paid under a

schedule in effect at Western Union since 1952.

Effective July, 1971, these amounts are 50% higher for employees represented by the United Telegraph Workers in the event of layoff due to transfer of work, reduction of office hours or office closures.

Based on an annual interest assumption of 5 1/2%.