Wednesday, November 23, 2011

Retirement Heist: How Firms Plunder Workers' Nest Eggs

Steve Denning
10/19/2011 @ 6:12PM

In December 2010, General Electric [GE] held its annual meeting in New York City for analysts and shareholders. CEO Jeff Immelt reported on GE’s financial health and said that GE’s pension plan was a problem. “The pension has been a drag for a decade,” he said. It would cause the company to lose 13 cents per share the coming year. In order to control costs, GE was—regretfully—going to close the pension plan for new employees. The implication was that workers’ pensions were dragging the company down.

What Immelt didn’t mention was that GE’s pension plans had actually contributed billions of dollars to the company’s bottom line over the last 15 years, earnings that the executives had taken credit for. Nor did he mention that GE hadn’t contributed anything to the workers’ pension plans since 1987 and still had enough to cover all the current and future retirees.

Nor did he mention that the executive pensions for GE executives were a burden. Unlike the plans for the 250,000 workers and retirees, the executive pensions had a $4.4 billion obligation that steadily drained cash from the company’s coffers, including $573 million over the past three years alone.

Why was GE closing its fully funded pension plan, while continuing its financially burdensome executive plan? This is the question to which Ellen Schultz’s incisive new book, Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers (Portfolio, 2011) offers a powerful answer.

She explains that the current retirement crisis is “not a demographic accident. It was manufactured by an alliance of two groups: top executives and their facilitators in the retirement industry—benefits consultants, insurance companies and banks.”

Executives are viewed “as beleaguered captains valiantly trying to keep their overloaded ships from being sunk in a perfect storm. In reality, they’re the silent pirates who looted the ships and left them to sink, along with the retirees, as they sailed away safely in their lifeboats.”

Two decades ago, pensions were well funded, due to laws and regulations passed in the 1970s and 1980s. By 2000, pension plans at many large companies had large surpluses that would have covered all current and future retirees’ pensions without them having to contribute anything.

Yet US firms found ways to siphon off billions of dollars in assets from the pension plans. Verizon used assets to finance downsizings. GE sold pension surpluses in restructuring deals, indirectly converting pension assets into cash. Many firms clandestinely cut benefits, using “actuarial sleight of hand to disguise the cuts.”


Since accounting rules rewarded employers for cutting benefits, retiree benefits plans soon morphed into profit centers. Retiree plans became handy earnings-management centers at the expense of the retirees. Yet as workers’ retirement benefits were cut, “supplemental executive pensions” ballooned along with escalating deferred compensation. “Today,” reports Schultz, “it’s common for a large company to owe its executives several billion dollars in pensions and deferred compensation.”

It’s these growing “executive legacy liabilities” that account for much of the “growing pension costs”. Executive liabilities are often large, growing, underfunded or unfunded, and hidden, buried within the figures for regular pensions.

“With no punitive damages under pension law, employers face little risk when they unilaterally slash benefits, even when promised in writing, since they can pay their lawyers with pension assets and drag out the cases until the retirees give up or die.”

Today, Schultz reports, “pension plans are collectively underfunded, hundreds are frozen, and retiree health benefits are an endangered species. And as executive pay and executive pensions spiral, these executive liabilities are slowly replacing pension obligations on many corporate balance sheets.”

The firms involved in these activities are not a few small unscrupulous operators. They are the best-known companies in the USA, including: GE, Verison, Dupont, Northrop Grumman, Marathon Oil, Lucent, Wal-Mart, General Motors, Chrysler, Ford, AT&T, US Airways, Delta Air Lines, Cigna, Bank of America, Caterpillar, Deere & Co, UPS—the list goes on and on.



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