Who Killed the Pension Plan?

WASHINGTON D.C. (MainStreet) -- The continuing collapse of traditional pension plans has undermined the confidence Americans once had that they could retire comfortably, and the push toward such alternatives as 401(k) plans has yet to meet expectations.

A forum last week -- "Retirement Heist: Overlooked Causes of the Retirement Crisis," sponsored by the Pension Rights Center, the New America Foundation and AARP -- looked at the many questions surrounding defined-benefit plans: What has been killing them off? How did once-healthy plans become so underfunded? Can they be saved and, if not, can alternatives really make up the gap?
A forum last week looked at some of the issues examined by Ellen Schultz in her Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers.

"This may not be consistent with the administration message, but I think the Pension Protection Act of 2006 was valuable in putting the final nails in the coffin of defined-benefit plans," says Phyllis Borzi, assistant secretary of labor of the Employee Benefits Security Administration, decrying provisions of that legislation that ultimately loosened funding requirements. "I think it was big mistake. I don't support companies not funding their pension obligations. It turned out to be something that was not a viable solution to the pension funding problems."

It is troubling to see that "pension decisions are balance sheet decisions," she says.

"For a long time, we thought a retirement security plan was a defined-benefit plan," Borzi says. "Now DB plans have sort of fallen out of favor. So then they were replaced by 401(k) plans and those were the silver bullet. Now we see that 401(k) plans are not doing the job. The problem is we don't have a Plan C. Somebody like me might say that Plan C is Social Security, but it is under assault now as well. People are struggling now, and I think it's good that people are talking about how to move forward and whether we need a new kind of pension plan."

Borzi says that DB participants have suffered because plans are too complicated and lack transparency.

"It's different when you have a 401(k) statement in your hand and it says your account balance is X," she says. " In DB plans employers hold all the cards. Employees can't police their benefit plans to make sure they are getting what they were promised and deserve."

Ellen Schultz, author of the recently released Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers (Portfolio, 2011), detailed some of the ways that companies have played fast and loose with their employees' retirement plans and "played a very large role in the retirement crisis."

Private-sector pensions are, on average, about 20% underfunded and many are freezing their plans, Schultz says. The problem, in many cases, is that company leadership has treated employee pension plans as either a "piggy bank" or "cookie jar."

Roughly a decade ago, many of the nation's biggest companies had pension plans flush with cash. GE ( GE) had about $25 billion in surplus, AT&T ( T) had $20 million and Verizon ( VZ), at the start of the 2000s, had $25 billion in surplus, she says. Now, all are running in a deficit, with Verizon's plan $3 billion in the hole, she says.

So what happened?

There were problems posed by stock market dips, the bursting of tech and housing bubbles and the driving down of interest rates. Other issues are more self-made, Schultz says.

Generally speaking, she says, companies have used pension assets to finance restructuring.

"If you want to get rid of 50,000 older workers, you can't just pull the money out and say, 'Here is severance,'" she says. "But what you can do is give them extra pension money, and that gets around the rule of not being able to use these assets for severance."

More controversial is her claim that pension plans have fed executive compensation and golden parachutes.

"This might sound odd to people, because you are only supposed to use pension benefits for the benefit of those in the plan, but there are a number of loopholes that companies developed and used that enabled them to use the assets to pay for things like parachutes," Schultz says. "The lovely thing about it is that it gets around the excise tax on golden parachutes."

There are layers to the issue, she says. Deferred compensation for executives has been -- through legal machinations -- shifted into pension funds.

Another damaging move was that pensions have been bought and sold as assets during mergers and acquisitions. Although there is a 10% cap, companies have also loaded as much company stock and real estate holdings into pension plans as assets. Healthy plans have been "killed off" to reap the surplus tax free (Schultz names the now bankrupt Montgomery Ward as having initiated such a move).

Legally, accounting rules have allowed benefit reductions -- from pensions to retiree health care and dental plans, anything that would be paid in the future -- to be recast as income.

"They essentially cannibalized their retiree benefit plans because you could get it down to the penny," Schultz says. "Say they need two cents a share to meet an earnings target. They could get that and calculate it because they had a lot of control over how the liability is measured."

Helping the bottom line at the expense of pension plans became even more problematic as executive compensation started to shift to a performance-based model.

"There was this correlation," Schultz says. "The ability to cannibalize your retiree plans coincided with, 'Gee, if you do that it increases the stock price and those incentives for executive pay.' I'm not saying that they sat down and said, 'Hey let's kill the retiree benefits and boost our pay.' I don't think people thought about it in such a straightforward way. But it was the result."

Deferring executive pay to keep from paying immediate taxes led to "billions owed to executives that created a pensionlike liability," she says. "Companies would complain, 'Our costly pensions, O woe is me,' and sometimes you'd look at the filings and see the only thing costing them was the executive pensions."

Schultz points to Massey Energy ( MEE), a company that was in the news last year for a mining accident that killed 29 workers in West Virginia and the departure of CEO Don Blankenship.

"His total payout was over $50 million -- that is just for him, one guy," she says. "The same time, same year, for thousands of miners, the total amount paid out for their pensions, for their retiree health care and for their traumatic workers comp -- which means crushed limbs, missing fingers, black lung benefits and things like that -- was a liability of only $37 million."

Schultz ticked through some recent accounting of executive liabilities: Fannie Mae ( FNMA), $500 million; Citigroup ( C), $5 billion; JPMorgan ( JPM), $8.2 billion.

Karen Ferguson, director of the Pension Rights Center, addressed some potential reforms.

"It's been suggested that you could create a separate 'bucket' on corporate income statements showing increases and decreases in pension assets and liabilities," she says. "I'm not an accountant, but it sounds good to me. Keep it on the books but keep it separate so people know what those liabilities are, so that they don't create these effects."

She also sees a need in recoupment practices, so that retirees no longer face the prospect of a company demanding that they pack back retirement assets that they never knew were overpaid. Regulations should also address the selling of surplus in mergers and acquisitions, Ferguson says.

She injected some optimism ino the debate.

"I should say that the pension game really isn't over," Ferguson added. "If you look at the latest statistics from the Bureau of Labor Statistics, you'll see that. If you look at the total nonfederal workforce, 28% is still covered by traditional pension plans and 37% is covered by 401(k)-type DC plans. There is overlap, but it's not over. Millions and millions are still in pension plans. We can preserve the system."

"The ultimate answer isn't just patching up what we have," she says. "American workers need and deserve something better. They need a system that doesn't place all of the risks and responsibilities on either the employer or on the employees. Workers need secure and adequate lifetime income. We owe it to them. We owe it to our country to work to that end."

"Even John Bogle, the 82-year-old founder of Vanguard, was quoted last week as calling the U.S. retirement system 'a real mess,' in need of deep-rooted reforms," she added. "He pointed out that the current average account balance in Vanguard's 401(k) plans was only about $26,000, and that rose to only about $60,000 for the median account balance of older people."

Ferguson called retirement statistics "shocking."

"Half of all retirees who are no longer in the workforce receive less than $16,500 a year. That's just above the minimum wage," she says. "How are they expected to pay their bills on that? In this, the most prosperous country in the world, it is amazing. Even more amazing is that our elderly poverty rate is the fifth-highest among 30 industrialized countries. It just doesn't make sense."

A video of the entire forum has been posted online here.

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here: Joe Mont.

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