DukeEmployees.com - Duke Energy Employee Advocate
Pensions - Page 2 - 2002
- Melissa Moye, chief economist, Amalgamated Bank - WSJ
401 (k) Improvements for AOL WorkersWashington Post - by Alec Klein – April 10, 2002
(Tuesday, April 9, 2002; Page E04) - AOL Time Warner Inc. has changed its retirement plan to allow employees to place company matching funds in investments other than its own shares, making workers' savings less dependent on the performance of the corporation's stock.
The New York-based media giant joins other companies that have adjusted their retirement plans since the collapse of Enron Corp. Many Enron employees lost their retirement savings -- invested in the energy trader's shares -- when the company stumbled.
"There was a lot of discussion and debate publicly about 401(k) plan flexibility for employees," said AOL Time Warner spokeswoman Tricia Primrose. "So the compensation committee of the board [of directors] reviewed the issue and approved the change for our plan."
The world's largest media company contributes as much as $2,000 a year in matching funds to each employee's 401(k) retirement plan. Until now, most matching funds were automatically invested in company shares.
Now, employees can invest matching funds in any of more than 100 mutual funds from Fidelity Investments and other fund families. Of AOL Time Warner's 89,300 employees, about 80 percent participate in the retirement plan.
Before the change, only people who were at least 50 years old and had been with the company for at least five years could switch the matching funds to other investments.
Time for Real Pension LegislationEmployee Advocate – DukeEmployees.com – April 6, 2002
The New York Times article “Pension Change Puts the Burden on the Worker,” by Edward Wyatt, noted that it was the Studebaker Car Company fiasco in 1963 that spurred the last significant pension legislation. Even after many workers lost their pensions, it took 11 years to pass the Employee Retirement Income Security Act (ERISA).
The article quoted Eric Lofgren, global director of Watson Wyatt as saying: “Retirement policy has really come to the forefront thanks to Enron, and I think it will stay there for a while. I would be surprised if there was not a series of legislative moves over the next decade, as we learn what works and what doesn't.”
Watson Wyatt makes money by selling corporations methods to deprive employees of their promised pensions. They devised the IBM cash balance conversion, which ignited the present day pension revolt in America. More correctly, “what works and what doesn't” means “what evasions we can get by with and what we can’t”!
ERISA is the best pension law going, but it is woefully inadequate. Consulting firms have plotted for years to devise a large number of ways to circumvent ERISA. Pension monstrosities, such as cash balance plans, were designed specifically to evade the intent of ERISA law. If you want better pension laws, let Congress know.
Your elected officials have never been more willing to listen to your pension complaints. If you have objections to:
by all means call, fax, or write Congress as soon and as often as possible! Silence is consent.
Pension ‘Raiders’ Facing DeficitsBeacon Journal – by John Russell – April 5, 2002
Every month, Don Baird opens his mailbox and finds a pension check from Goodyear, where he toiled for 23 years as a midlevel salaried worker.
So far, he's never missed a check. But it still rankles the 69-year-old Akron retiree that 14 years ago, Goodyear transferred $400 million from its overfunded pension plan into the general fund.
Around the country, dozens of other companies did the same thing, cashing in their overfunded pension plans and using the surplus to repurchase stock, pay debt or make acquisitions.
``It's always bugged me that these companies were allowed to rake off these pension funds,'' Baird said. ``I felt it was the employees' money. It should have stayed separate. Good times don't last forever.''
Indeed, Goodyear, Akron's largest for-profit employer, now faces a $1 billion deficit in its pension fund after two disappointing years in the stock market that have wiped out hundreds of millions of dollars from the fund in the last two years.
At the same time, Goodyear's pension obligations are rising as the company has offered early retirement plans to hundreds of workers in recent years to cut costs.
Around the country, hundreds of other companies cashed in their fat pension funds in the 1980s, as Goodyear did, through a complex but legal procedure of shutting down the funds, selling the pension plans to outside insurance companies, and keeping surplus money for other purposes.
And many of those companies now find themselves facing large deficits in their pension plans. Some consumer groups have called the process ``pension raiding,'' a corporate practice that swept the country.
And before the law was changed in 1990 to discourage the practice, Goodyear was one of the biggest ``raiders'' in the country at No. 5 on the top 10 list compiled by the Pension Rights Center, a consumer advocacy group based in Washington that promotes pension rights of American workers.
Other companies on the list include Exxon, United Airlines Inc., Merrill Lynch & Co. Inc. and Union Carbide Corp.
``We were very much opposed to pension raiding,'' said John Hotz, the group's deputy director. ``These monies were put into the pension plans to fund benefits specifically for participants. Now some of these plans are in a little trouble.''
Today, eight of the 10 companies on the top 10 list have pension deficits, according to the companies' financial filings with the Securities and Exchange Commission. The deficits range from $16.7 million at the Great Atlantic & Pacific Tea Co. to $2.5 billion at United Airlines.
In contrast, Union Carbine. (bought last year by Dow Chemical Co.) had a pension surplus of $83 million. Bridgestone Corp. of Japan, the only foreign company on the list, said its U.S. pension fund carries surplus but didn't have a recent figure. Bridgestone bought Akron's Firestone Tire & Rubber Co. in 1988, three years after Firestone transferred $285 million from its salaried pension fund into its general coffers.
Retirees at Goodyear actually have little to worry about. When the Akron tire maker terminated its salaried pension fund in 1988, it bought an annuity contract from Metropolitan Life Insurance Co. to pay the pensions of all salaried workers who had retired up until that year.
``I get a check once a month. I've never missed it, and I'm not concerned about it,'' said Joseph Mittiga, who retired in 1986 from Goodyear's former aerospace unit. The company sold that unit in the late 1980s to reduce debt it amassed during an attempted corporate takeover by the late James Goldsmith.
Goodyear set up a new plan to cover workers who retired after 1988.
The tire company used the $400 million surplus from the old pension plan in 1988 to reduce debt and boost earnings.
Goodyear is not required to make an additional payment into the fund until Sept. 15, 2003.
The company, struggling with losses and a huge debt, has said it will remain in compliance with pension funding requirements, although it declined to say where it would find the extra money to contribute.
The fund had a balance of almost $4.2 billion as of Dec. 31. The plan covers tens of thousands of workers in many countries. About 40 percent of Goodyear's pension liability is to employees in the United States. Goodyear said yesterday that relating the current deficit to the 1988 decision to transfer money out of the pension fund is unfair.
``To look back at decisions made by many companies nearly 14 years ago and link them to today's volatile market environment is unreasonable,'' spokesman Keith Price said. ``What is important is that we are committed to meeting our pension fund obligations. We will continue to address the requirements to meet our obligations to the people who have served and continue to serve our company.''
Even consumer advocates say Goodyear has a point. Companies put their pension funds in a wide array of investments, and it would be nearly impossible to guess how they might have invested the extra funds. But since Goodyear terminated the plan in 1988, the Standard & Poor's 500 index has climbed 462 percent. That means an investment of $400 million invested in the S&P 500 index companies, with dividends reinvested, would yield almost $2 billion today.
``Would Goodyear's fund be underfunded today if it had left that money in? Who is to say?'' said Hotz of the Pension Rights Center. ``There are all kinds of issues and factors, both in the company and in the market. And to be honest, as long as a company like Goodyear has a reasonable chance of success in the future, the underfunding doesn't raise monumental concerns.''
Last year, about 60 percent of private pension plans at American companies found themselves underfunded -- twice as many as a year before -- chiefly because of a downturn in the stock market where many of the funds are invested, according to Watson Wyatt Worldwide, an employee benefits consulting firm based in Washington.
Two years after Goodyear pulled its surplus money out of the original pension plan, Congress passed the Pension Protection Act of 1990, which imposed a 50 percent excise tax on any surplus funds that companies cashed out of pension plans. Since then, fewer and fewer companies have shut down or sold pension plans to use the extra cash for other purposes. But it's still possible.
``It is still legal to this day to terminate the plans and take excess assets, and use it for other purposes, after paying some pretty hefty taxes,'' said Dr. Olivia S. Mitchell, professor of insurance and risk management at the Wharton School of the University of Pennsylvania. ``But it really hasn't happened a lot in the last 15 or so years.''
Global Pension DissensionReuters – by Luke Baker – March 24, 2002
ROME (Reuters) - At least two million trade unionists descended on Rome on Saturday, filling the city center with a sea of red flags in a massive show of force against plans by Prime Minister Silvio Berlusconi to re-write labor laws.
The demonstration was also broadened into a protest against political violence following the killing last Tuesday of a senior government adviser who helped draw up changes to Italy's long-standing employment rules.
More than 9,000 buses and 60 special trains carried members of Italy's largest union, the CGIL, from all corners of Italy to Rome, bringing the capital to a standstill.
There was a heavy police presence and helicopters buzzed overhead monitoring the crowds. Hundreds of anti-globalization protesters mingled with the throngs of marchers.
Television broadcasts and union leaders estimated the turnout at more than two million. Police said there were at least one million but didn't provide a definitive figure.
Tuesday's murder of government adviser Marco Biagi by leftist extremists cast a pall over the event, but union leaders said they would not let the killing lessen their resolve. They held a minute's silence during the rally to honor Biagi.
"We are here to fight terrorism, to support democracy and to show the government its intentions are wrong," CGIL leader Sergio Cofferati told supporters crammed into the Circus Maximus, site of ancient Rome's chariot races.
"With your courage and your passion, we will realize our dreams," he said to loud cheers and applause. Biagi was a respected economist who had worked with both the previous center-left administration and the current conservative government on labor issues. An offshoot of the Red Brigades guerrilla movement claimed responsibility for his killing.
The CGIL said Saturday's turnout was one of the biggest in modern Italian history and exceeded a 1994 rally when more than a million people took to the streets to protest pension reforms put forward by Berlusconi during his first stint in government.
Shortly after that demonstration, Berlusconi's government collapsed and he was not voted back into power until last year.
Cofferati said Saturday's rally was only the first step in a campaign by unions against the government's policies: next week they will hold a mass demonstration against terrorism and for workers' rights and will set a date for a general strike which could paralyze the country.
"Our fundamental rights are at stake, the rights of workers and the poor," said Pietro, 50, a construction worker who traveled to Rome from Brindisi on the heel of Italy. "I couldn't not be here."
"I'm here not so much for myself, but for my 13-month-old daughter," said Maria Cristina, 30, a secretary. "I want to fight for the rights she should have when she starts to work."
Unionists say the proposed labor reforms will make it easier for companies to sack staff. Berlusconi says they will make the labor market more flexible and create jobs.
While Cofferati and other union leaders -- who together represent some 12 million workers and pensioners -- reveled in the giant show of support, Berlusconi's allies were dismissive.
"This is not good for the Italian people," said Renato Schifani, a senior senator from Berlusconi's Forza Italia party.
"At this difficult time, we would have expected someone like Cofferati to try to reduce the social friction which risks feeding the atmosphere of terrorism. Unfortunately, that hasn't been the case today."
The march comes at a time of heightened social and political tension in Italy, the shooting of Biagi raising fears of a return to the political violence of the 1970s and 1980s.
While unionists were among the first to condemn Biagi's killing, his death and its timing has left the labor movement in a delicate position, with some rightist politicians linking extreme left-wing union factions to the murder.
Cofferati was quick to denounce those who made that connection and said if anything Biagi's murder had strengthened his and the union's resolve to tackle the government on reform.
"Terrorism cannot be used to twist social relations," he said, adding that Berlusconi would not get his way. Waving banners reading "Terrorism kills our rights" and "Don't touch Article 18" -- a reference to the labor reform the government wants to push through -- Saturday's protesters appeared determined but peaceful. Married couple Roberto and Roberta, both 28, said they attended the march because they fear that their most basic rights are threatened.
"Touching Article 18 is meddling with the very foundation of democracy in this country," Roberto said.
Workers Need Good Pension PlansCongressman Sanders - Press Release - March 9, 2002
(3/6/02) - WASHINGTON -- Congressman Bernie Sanders (I-VT) today expressed his outrage in the corporate attack against the pension plans of American workers.
Sanders said, “Fewer Americans today have guaranteed pension plans that they can rely on. Meanwhile, at the same time large corporations are cutting back on the pension benefits of their employees, CEOs are receiving pension plans, stock options and other compensation worth hundreds of millions of dollars. This is outrageous.”
According to a recent article that appeared in the New York Times, “When Louis V. Gerstner retired as I.B.M.'s chief executive last week, he became eligible for an annual pension of at least $1.1 million, precisely what the company promised in his contract when he joined eight years ago. As part of a 1999 cost-cutting program, however, many I.B.M. employees are set to receive smaller pensions and retirement health insurance benefits than they were promised when they were hired.”
Sanders, who has led the fight in Congress to protect the pensions of workers at IBM and other companies, is working on legislation to protect and expand pension coverage for American workers.
The New York Times article referred to is below:
Security Blanket for ExecutivesNew York Times – by David Leonhardt – March 6, 2002
(3/5/02) - General Electric allows its top executives to contribute money to a retirement fund on which the company recently guaranteed an annual return of at least 10 percent, far better than a typical G.E. worker saving money in the company's 401(k) plan can expect.
Tenneco Automotive, which makes shock absorbers, permits its executives to receive a full pension at age 55, seven years before the company's other employees can.
When Louis V. Gerstner retired as I.B.M.'s chief executive last week, he became eligible for an annual pension of at least $1.1 million, precisely what the company promised in his contract when he joined eight years ago. As part of a 1999 cost-cutting program, however, many I.B.M. employees are set to receive smaller pensions and retirement health insurance benefits than they were promised when they were hired. Such contrasts have become the norm over the last two decades, as the United States has increasingly developed a two- tier pension system. Companies seeking to increase profits have cut retirement benefits, leaving many members of the baby boom generation unprepared for life after age 65 despite the long bull market, economists say.
But executives have persuaded their directors to reward them with ever-larger pay packages. On top of millions in salary, bonus and stock options, many top managers have received pensions that are more generous than they once were and are often devoid of the risk inherent in the typical 401(k) plans that have replaced the old company pension for many workers.
Some companies give their executives large annual payments and guaranteed investment returns. Others, including Bank of America and Estée Lauder, pay the premiums on life insurance policies for executives, allowing them, or their heirs, to collect cash payments decades after retirement. Delta Air Lines and the AMR Corporation, the parent of American Airlines, as well as other companies give executives credit for many more years of service than they actually have, increasing their pensions.
In recent weeks, policy makers have focused attention on the plight of workers at Enron and Global Crossing, who had invested most of their retirement savings in company stock that is now almost worthless. Many executives escaped in much better shape, having received multimillion-dollar payments or sold many shares before the companies filed for bankruptcy and their share prices plummeted.
Far more common, however, are the diverging of fortunes at healthy companies like G.E. and I.B.M. From 1983 to 1998, the last year for which the government has published data, the amount of retirement money held by the typical household with people from age 47 to 64 fell 11 percent after being adjusted for inflation, according to a recent study by Prof. Edward N. Wolff, an economist at New York University. That number includes private pensions and the value of anticipated Social Security benefits.
The decline occurred as many companies replaced traditional pensions, which pay a predetermined annual benefit, with voluntary savings programs like the 401(k). While higher-income workers were able to save a significant part of their salaries and benefit from the stock market's run-up, many other workers found it hard to set aside money for retirement. At the same time, companies were cutting their retirement contributions as they switched to 401(k) programs.
Expected Social Security benefits have also declined since the early 1980's because inflation-adjusted earnings have fallen for most workers.
"A lot of families are going to have to work more years to build up their pension accounts and generate enough income for retirement," Professor Wolff said. "It's basically a decrease in living standards."
Executives, meanwhile, have sweetened their pensions, ensuring that the plans will be generous even if the company's stock, or the market as a whole, is suffering, pay consultants say.
Judith Fischer, managing director of Executive Compensation Advisory Services, said, "In the early 90's, when risk reared its ugly head" and a recession brought down many share prices, "executives went back to their companies and said, `Look, let's add a little something extra to abate the risk.' "
As a result, Ms. Fischer added, "Executive retirement plans and employee retirement plans are really no longer recognizable as related."
There are no broad statistics on executive retirement programs, in part because companies are not required to publish many of the details. While companies must report the salary, bonus and stock award for each of the top five executives, they can lump together pension liabilities without specifying how much is owed to executives and how much is owed to other employees.
The boom in executive pensions began in the 1980's, after the federal government enacted a law limiting the amount of an employee's salary that a company can consider when contributing to pension coffers.
Executives quickly flipped the purpose of the law by establishing separate retirement plans for themselves, divorcing their financial interests from company pensions.
In many cases, executive pensions give benefits that are far more generous than rank-and-file workers receive, even after the differences in salaries are taken into account. Bank One adopted a plan in 1998 that pays top executives up to 60 percent of the average of the final five years of their salary, according to a company filing with the Securities and Exchange Commission.
Tenneco, in calculating pensions, multiplies its employees' compensation by the number of years they have worked at the company. Top executives receive up to 4 percent of this sum annually; other employees receive up to 1.6 percent.
Fewer than one-fifth of all workers in the United States have a traditional defined-benefit pension, said Annika Sunden, an economist at the Center for Retirement Research at Boston College. The typical private pension pays about $6,000 a year.
At some companies, including the Interpublic Group, an advertising agency, and Mattel, the toymaker, executives can begin receiving a full pension at age 60.
According to the original contract for Mr. Gerstner, who is 60, his pension will be at least $1.1 million a year. The company will announce any additional benefits in a filing later this year, an I.B.M. spokesman, Rob Wilson, said.
That has angered some of I.B.M.'s 319,000 employees, many of whom lost benefits in 1999 when the company changed its pension program.
"It's just horrible that these companies are getting away with this," said Lynda P. French, a 57-year-old former I.B.M. software analyst in Austin, Tex., who used the Internet to organize employee opposition to the pension changes. "These C.E.O.'s are escalating their golden parachutes while they're cutting from the workers."
Ms. French said that I.B.M. had recently raised her health care premiums and that when her husband retires from the company, their health care benefits would be less generous than those received by previous generations of retirees.
Phil Nigh, a 41-year-old engineer in Essex Junction, Vt., who has worked for I.B.M. since 1983, said his pension would probably be 25 percent to 40 percent lower than it would have been before the company changed the plan.
"In my opinion, people lost a lot of trust in executive decisions" after the change, Mr. Nigh said. "They assumed I.B.M. would live up to its promises, and this kind of woke everybody up."
Mr. Wilson, the I.B.M. spokesman, said Mr. Gerstner's pension was not affected by the 1999 change because it was part of the contract between him and the company. "They are two separate things," Mr. Wilson said, referring to Mr. Gerstner's pension and that of other employees.
Since Enron's collapse, both Republican and Democratic lawmakers have said that some pension rules should be changed to prevent bankruptcy filings from hurting only lower-level employees. But the most prominent proposals, including President Bush's, would not alter basic rules covering executive pensions. Pay consultants say the issue is often difficult to understand because many benefits are not made public, and those that are disclosed can be complicated.
One common perk is a life insurance policy on which a company pays the premiums. Executives can cash out of the policy while they are still alive or the benefits will be paid to heirs. Before the insurance company pays the benefits, it subtracts the combined amount of the premiums and pays this amount to the company — minus any interest.
"It's like the company is making an interest-free loan," said David M. Leach, the director of the compensation practice at Buck Consultants in New York. "It's losing the use of its money."
Many other executive benefits remain hidden from investors and employees because the S.E.C. does not require that all plans be fully explained.
"These are obligations that companies have that they are not disclosing to shareholders," said Carol Bowie, a director at the Investor Responsibility Research Center in Washington. "With executives, you're dealing with a group of people who have very few controls on what they can do."
Concerns About Cash-Balance PlansRochester Post-Bulletin – by Angela Greiling Keane – March 6, 2002
(3/2/02) - WASHINGTON - Rochester pension activist Janet Krueger didn't get to change the world of retirement security this week at a national conference. But she said she was able to air her complaints about cash-balance pension plans to an audience of influential thinkers.
Krueger was one of about 250 delegates at the second National Summit on Retirement Savings, a two-day conference to brainstorm ideas for repairing part of the nation's retirement system.
The delegates were split between Democrat appointees and Republican appointees; Krueger fell in the former group. The Labor Department, with the help of corporate underwriters, conducted the conference.
The summit's purpose was to brainstorm strategies to promote savings among people of all age groups, financial means and backgrounds throughout the United States. Financial observers generally agree that Americans should save more money.
Delegates were divided into four parts, with each part assigned to develop strategies for promoting personal savings to a particular generation. Although she had requested the Baby Boomer group, Krueger was assigned to discuss how to reach Generation X.
Krueger came to Washington hoping to do more than discuss what essentially turned out to be the groundwork for an ad campaign.
"They set the end result as how to convince more people to participate in individual savings," Krueger said. "But they forced us to stay away from the broader question of whether individual savings constitute a good enough retirement policy."
Krueger became active in pension and retirement issues after her former Rochester employer, IBM, changed its company-wide pension plan from a defined-benefit plan to a cash-balance plan. Krueger and other Baby Boomer employees found their retirement payouts would be harmed by the plan change. They were too young to be exempted from the change, as employees closer to retirement were, yet too old to have time to reap the benefits of the new system.
Krueger quit her job with IBM and has become a leading national activist on the IBM change, as well as on similar situations in other companies. That experience led to her becoming a delegate to this week's conference, which concluded Friday.
Speakers at the gathering included President George W. Bush, Labor Secretary Elaine Chao, Federal Reserve Chairman Alan Greenspan and Sen. Ted Kennedy, D-Mass.
Bush implored people to squirrel away more money for retirement.
"Americans are saving too little - often dangerously too little," Bush told the delegates on Thursday. "The average 50-year-old in America has less than $40,000 in personal financial wealth. The average American retires with only enough savings to provide 60 percent of his former income. This problem is especially acute for women and minorities."
Krueger said that although there is nothing wrong with promoting individual savings through plans such as 401(k)s, she also believes people need a broader safety net.
"The problem with individual savings is people can make bad decisions," Krueger said.
Enron Pension Efforts Draw FireWall Street Journal – by Ellen E. Schultz – March 5, 2002
March 1 — The losses in the Enron Corp. 401(k) plan have led to calls for 401(k) changes. But now, its pension practices are generating calls for pension overhaul as well. In a Senate Finance Committee hearing this week, David Walker, head of the General Accounting Office, took aim at “floor-offset” plans and “cash balance” plans, both of which are types of pension arrangements that Enron has used.
“Enron’s Failure highlights the importance of plan participants receiving clear information about their pension plan and any changes to it that could affect plan benefits,” his written testimony noted. “The extent to which Enron employees were informed or understood the effect of the floor-offset or the conversion of their [pension] plan to a cash balance formula is unclear,” he testified.
In light of Enron, Mr. Walker suggested that Congress should repeal floor-offset arrangements, and called for companies to provide employees with more information about how changing to a cash balance plan can reduce their benefits.
Enron, like many companies, had a floor-offset arrangement that coordinated its pension plans with its employee stock ownership plan. Typically, employees are promised either the amount they earn in the pension, or — if it is greater — the amount they accumulate in the savings plan (either a profit-sharing plan or ESOP).
To most employees who have them, a floor-offset sounds innocuous. If the ESOP or profit-sharing plan doesn’t perform well, the pension plan provides a minimum, or “floor” benefit. Companies generally adopt offsets because it reduces their pension costs; various types of offsets have been used by companies including Hewlett-Packard Co., Montgomery Ward and LTV Steel Co.
Employers generally say they adopt the arrangements to give employees the potential to earn more retirement benefits, especially when the retirement plan is funded with employer stock.
But employees have complained that while they know what the value of their profit-sharing or ESOP account is, they don’t know how the employers have calculated the value of their pensions. As a result, they don’t know whether they are being given the greater value.
Some employees of Xerox Corp. charged in a civil suit against the company that it used a floor-offset to hide how it calculated their pension lump sums, and that it underpaid them.
Last year, a federal court in Boston agreed with the employees (in Berger v. Xerox); potential damages to Xerox are $300 million. A Xerox spokesman said the settlement figure hasn’t been set by the court and declined further comment.
Enron, in an unusual move, “offset” the pension with the value of the ESOP accounts based on the price of the stock from 1996 to 2000, when it was trading in the $40 range. As a result, the phantom past values of the ESOPs permanently erased some of the pensions people had earned in earlier years. There is some question as to whether this approach constituted an illegal reduction in pension benefits under federal pension law. When the value of the ESOP evaporated in recent months, the employees were left with permanently reduced pensions, and virtually worthless ESOP accounts.
Enron didn’t respond to calls for comment.
Enron’s pension situation has renewed attention on floor-offset plans. In the 1980s, when Mr. Walker was the assistant secretary of labor, he recommended that all floor-offset arrangements be banned because “they pose a risk to pension plans and the pension insurance system.”
In 1987, Congress banned ESOP-pension floor-offsets (companies can still offset pensions with profit-sharing plans). But Congress grandfathered Enron’s floor-offset ESOP and those of about 150 other companies, many of which continue to operate.
Mr. Walker isn’t the only critic of floor-offsets. In July 2001, Judge Frank Easterbrook, in the U.S. Court of Appeals in Chicago, found that Sundstrand Corp. had correctly calculated benefits in its floor-offset plan, an issue employees had raised in White v. Sundstrand.
“However, he observed that, Any pension plan giving retirees the greater of two amounts as opposed to the sum of these amounts, can be described as confiscating the difference.” He wrote that “the retiree always ‘loses’ the defined contribution balance [principal and interest] up to the floor in the [pension] plan. What the employee loses, the plan receives.”
Sundstrand is now part of United Technologies Corp.’s Hamilton Sundstrand Corp. unit. A United Technologies spokesman says that only about 200 employees, in a unit acquired 18 years ago, are affected by a floor-offset, and that the company now has roughly 62,000 employees in the domestic plans.
Shareholder Resolution Gets ResultsWall Street Journal – by Ellen E. Schultz – February 26, 2002
In what appears to be a first, McDermott International Inc. agreed to determine compensation for senior executives without regard to any income generated by its pension plan.
The company plans to make reference to the new policy in its coming proxy statement; it took the action after a shareholder resolution raised the issue.
Amalgamated Bank, which filed the resolution, noted that pension income is contributing to the bottom line of many large companies and, in turn, boosting executive pay that is based on earnings.
"Pension plans shouldn't be used to boost executive pay," says Melissa Moye, chief economist at Amalgamated Bank, which manages the LongView Funds, which are used by various pension plans.
The resolution cited a June 2001 study by Credit Suisse First Boston, which noted that in 2000, 30% of the companies in the Standard & Poor's 500-stock index reported pension income that added, on average, 12% to their pretax earnings.
The phenomenon was especially pronounced at McDermott, a New Orleans construction firm in the energy field, which reported a pretax loss of $10 million in 2000. However, the losses were offset by the nearly $40 million gain from the pension plan. (Pension "income" isn't actual income on the pension investments; rather, it is a figure generated by accounting rules, which let companies count as income the amount by which estimated investment returns on pension assets exceed a pension plan's current costs.)
"Our executives thought [the proposal] was a good idea, so we recommended that the company adopt a resolution that performance goals and awards not be influenced by the pension plan," says John Nesser, general counsel and corporate secretary of McDermott. He says the company's proposal, which takes effect in 2002, will reward executives based on their performance "and not punish them for things outside the scope of their performance."
Amalgamated withdrew its resolution after McDermott stated its intention to adopt the new policy.
Because executive compensation is increasingly based on earnings, some shareholder groups have argued that the pension income should be disregarded, as it doesn't represent corporate operations and performance. When executive pay is linked to pension income, "it provides companies with an incentive to manipulate assumptions in the pension plan, to boost income and manage earnings," says Amalgamated Bank's Ms. Moye.
"There's also a fairness issue," she adds. "We don't want improper incentives to limit benefits for workers and retirees."
In recent years, pension income has been growing, thanks not only to healthy returns on pension assets, but also to cuts in pension benefits. By converting to less-generous pension formulas, such as "cash-balance" plans, and by withholding cost-of-living increases for retirees, companies have reduced their pension liabilities.
However, as companies have cut pensions for regular workers, most have been boosting pensions for senior executives. The executive pensions are based on their compensation, which is based on earnings. Consequently, cutting pensions for regular workers indirectly boosts compensation -- and thus the pensions -- of top executives.
Despite recent declines in the stock market, pension income continues to contribute significantly to the bottom line of many companies, as most still have substantial pension surpluses.
To be sure, companies that disregard pension income when calculating executive compensation aren't likely to be really taking something away from executives. Compensation can be restructured to provide what would have been given, assuming the pension income were counted. And if the pension plan actually creates a drag on earnings, executives will no doubt welcome having the pension expense disregarded.
AT&T Pension LawsuitEmployee Advocate – DukeEmployees.com – February 25, 2002
The AT&T Concerned Employees Council On Retirement Protection (ACE CORP) sent us an update on 2/24/02. Their pension lawsuit against AT&T has achieved class action status.
As you might expect, AT&T has fought the suit by employing every imaginable delay tactic and had made four motions for the claims to be dismissed. The company appealed the class certification and lost.
Congratulations to the AT&T employees for their latest success in obtaining pension justice!
Click the link below to read the update from last year:
Enron Executives Enjoy Protected PensionsWall Street Journal – by T. Francis, E. Schultz – February 11, 2002
Feb. 7 — Enron’s bankruptcy may have wiped out most of the retirement savings of most of its workers. But one thing it didn’t take away were the pensions of its most senior executives. Financial filings disclose that former Enron Chairman Kenneth Lay, for one, used a private partnership to protect millions of dollars worth of executive pension benefits.
To be sure, many Enron executives lost millions of dollars they had saved in deferred compensation plans, which are special savings plans that function much like outsize 401(k)s for executives, when the company filed for bankruptcy-court protection on Dec. 2. These executives will join other unsecured creditors in seeking to recover money from Enron. However, executive agreements filed with the Securities and Exchange Commission over the years disclose that the most senior executives, who enjoyed more elite arrangements, were also able to shield their special pension packages from bankruptcy and protect them from creditors by sheltering them within private partnerships.
Filings show that Enron contributed millions of dollars to fund two life-insurance policies held by a private Texas partnership bearing the initials of Lay and his wife, Linda Phillips Lay. The KLL & LPL Family Partnership Ltd., which listed Lay as managing partner, owned the policies, one of which carries a face value of $12 million. The other, which has an undisclosed face value, is on the joint lives of Lay and his wife.
These kinds of arrangements aren’t unusual. Indeed, at most large companies, top executives who participate in special retirement and pension plans are taking advantage of similar types of partnerships and trusts, which enable the executives to shelter large amounts of compensation from taxes, and pass it largely tax-free to heirs — and indeed are proliferating. Last month, the deals got a big boost when the Internal Revenue Service, at the urging of the Bush administration, employer groups and the insurance industry, backed off a proposal introduced under the last administration to tax the insurance arrangements more heavily.
As part of an employment agreement Enron signed with Lay in 1996, the company agreed to pay a total of $1.25 million in premiums over five years on a $12 million life-insurance policy. Enron would receive the premium money back — without interest — only after Lay’s death and the policy’s execution. The partnership, and presumably Lay’s heirs, would receive the rest. (The kinds of life insurance used in these arrangements is called “split-dollar,” since the premiums are split between the company and the executive, who decides who receives the bulk of the money invested in the contracts, plus the earnings.)
As is common in these arrangements, Lay could withdraw funds from or borrow against the policy’s cash value.
The company agreed to pay another $280,285 in annual premiums for nine years on a second split-dollar life-insurance policy for Lay and his wife, which he got in return for giving up other special executive retirement benefits.
Similarly, Jeffrey Skilling, who resigned as Enron CEO in August, had an $8 million split-dollar life-insurance policy held by the Jeffrey Keith Skilling Family Trust, whose trustee was Mark David Skilling, who isn’t further identified.
Although Lay’s and Skilling’s agreements automatically terminated with Enron’s bankruptcy or the executive’s departure from the company, they included provisions that essentially allowed the executives to buy out Enron’s interest in the policies within 60 days for the cost of premiums paid to that point. According to filings, the final $250,000 payment on Lay’s $12 million policy was due in 2001; it isn’t clear how many payments remain on the other policy.
It is unclear whether Skilling did buy Enron out. Skilling couldn’t be reached, and Enron declined to comment. Regarding his own policy, Lay, through a spokeswoman, said he is “still evaluating his options, and no decisions have been made as of yet.”
The assets in these policies are protected from creditors. The policies aren’t assets of Enron, and the policies are secure from creditors who sue the executives personally. “It looks like they’re home free,” says Brian McTigue, a Washington lawyer who isn’t involved in Enron litigation.
Enron’s filings are silent about other arrangements it may have with Lay, Skilling and others, and the value of those arrangements. Companies aren’t required to disclose whether the trusts that shelter deferred compensation, for example, allow executives to cash out their money when a bankruptcy petition is filed. Moreover, Enron filed many compensation documents piecemeal, filing amendments as they were adopted, but often without a full restatement. The practice, while generally legal, makes reconstructing years-old benefit plans more difficult.
Milwaukee Pension ScandalAssociated Press – by Carrie Antlfinger – February 10, 2002
MILWAUKEE –– A year ago, the Milwaukee County government made its employee pension plan more generous instead of giving bigger pay raises. But reporters did the math recently and found out that some of the politicians involved stand to get million-dollar payouts when they retire.
The findings have caused a scandal in this state long known for its squeaky-clean government.
Five Milwaukee County officials, including the plan's chief negotiators, have resigned. Eight others are being targeted for recall by citizens groups. And the state Justice Department's criminal division is investigating.
The changes in the pension plan enabled the county to offer only a small pay raise to its full-time work force of 5,800 and avoid a major tax increase.
Employees who had worked past their retirement dates could collect retirement benefits retroactively, and employees could collect a bigger portion of their unused sick time at retirement. The pension fund could cover the extra cost because of good investments over the past decade.
But then, in recent months, the Web site Milwaukeeworld.com, Milwaukee Magazine and the Milwaukee Journal Sentinel took a closer look.
The reporters found that the new formula would mean a lump-sum payment of $2.3 million to County Executive F. Thomas Ament, who became eligible to retire in 1996, and payments of $1 million or more to several other county officials.
Steven Huff, counsel to the county pension board, said a federal law caps how much Ament, 64, could receive. Still, if Ament were to retire in 2004, he would get a lump sum of $559,000 and an annual pension of $102,000.
Ament and county board members have said they should have asked more questions before approving the plan in November 2000, and Ament has signed waivers preventing him from collecting the higher benefits. Enacting it was "a major mistake," Ament said last week. "I don't believe county government should have the potential for these kinds of payouts."
The pension rules governing elected officials and other nonunion employees can be changed by passing an ordinance and getting each person's consent. But rescinding the rules for the 4,400 full-time unionized employees would further require the reopening of contract talks, something the biggest union refuses to do.
Its current contract expires in 2004.
About 300 county employees have retired or plan to retire soon, in most cases because they fear their pension benefits will be rolled back, said Jac Amerell, the head of the county's pension office.
Citizens groups have begun a drive to recall Ament and seven members of the 25-person county board.
"I think the vast majority of people don't trust Tom Ament and don't trust county government," said Bryan Olen, spokesman for Citizens for a Responsible Government.
Ament, who was re-elected in 2000 with about 80 percent of the vote, has filed a lawsuit challenging the signatures that the group has gathered in its effort to force a recall election.
The pension plan "is just one more indication that something is terribly wrong with the way our legislators are acting in a state that has been known as the most upright state in the nation," said Jay Heck, executive director of Common Cause in Wisconsin, a government watchdog group.
District attorneys in two Wisconsin counties are already investigating whether state employees illegally used state resources for political campaigns. And in Milwaukee, Mayor John Norquist has been accused of sexual harassment by a former aide. Norquist has denied the allegations.