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Pensions - Duke Energy Employee Advocate

Pensions - Page 3 - 2002

"There's a lot of distrust about pensions and retirement savings plans" - Carl E. Van Horn

Pension Reform Quietly Being Retired

Pittsburgh Post-Gazette – by Ann McFeatters – June 4, 2002

Business doesn't really want to change its way of doing business

(6/2/02) - WASHINGTON - If you're feeling mellow and don't want to get outraged, stop reading. Now. This column is about how our retirement savings are disappearing and how the federal government -- and Congress and the White House -- are doing nothing about it.

After the collapse of Texas-based Enron when millions lost money on its stock and thousands of its own employees lost their 401(k) savings, politicians raced to open microphones to denounce the financial evildoers and vow action. Hearings were held. Americans were promised: "Never again." Legislative reform, we were assured, was just around the corner.

The corner has faded into the distant horizon.

The Senate Banking Committee is no longer actively considering a reform bill to change accounting procedures. The Senate has not even scheduled action on a pension reform bill that would let employees sell company stock, as managers of Enron did while most employees could not, and would prevent companies from offering stock both as a matching contribution and as an investment option.

The House has passed its own bills, to let employees diversify their 401(k) plans and to rein in accounting firms from having conflicts of interest with the clients they audit, but they are completely different from the Senate version. With only a few months before lawmakers go home to campaign for re-election, controversial legislation is doomed. And, without doubt, this is controversial legislation.

Finding out how this happened is enlightening.

It turns out that business doesn't really want to change its way of doing business. The U.S. Chamber of Commerce opposes the reform bills. So does the powerful behind-the-scenes Business Roundtable. So do many other business organizations.

They use the same old shibboleths -- fear of more government bureaucracy, fear of lost jobs, fear of new brakes on the economy. Of course, the Enron disaster such legislation might have prevented was no boon to the economy -- or to thousands of families wondering how they'll survive after 65.

Changing accounting practices is no way to grab the public's attention. And while millions of Americans now have 401(k) plans to which they contribute an average of 8.34 percent of their paychecks, the value of such plans rises and falls regularly (mostly, lately, they fall) and safeguarding them with new bureaucratic rules doesn't seem a momentous need. The death of a few arcane bills on Capitol Hill probably won't bring a groundswell of public protest.

On the other hand, those business groups still are able through the November elections to give politicians campaign donations before the new campaign finance rules kick in. And with control of the House and the Senate up for grabs, those donations matter mightily.

Harvey Pitt became chairman of the Securities and Exchange Commission (another in the myriad of Washington agencies few people really understand) in August 2001. Before taking the position, he was a prominent lawyer in the securities field, giving advice to all the big accounting firms that were glossing over their clients' financial warning signs. He says that Americans simply have to pay more attention to where the money for their retirement is going to come from and that a "massive restructuring" of regulation of the capital markets is vital.

Pitt says companies should have to disclose more true financial information in shareholder reports. He says there should be a new oversight board to govern the accounting industry. He says that top hat executives should have to give back bonuses and stock options and huge salaries for masterminding financial performance that turns out to be a shell game.

Standard & Poor's, the private bond rating agency, Federal Reserve Chairman Alan Greenspan and billionaire investor Warren Buffett are losing patience, saying the accounting industry's standards have to be raised or Americans' disenchantment with the stock market will become a serious drain on the economy.

But Pitt, despite his speeches given in large measure to stem calls for his resignation and hang on to some credibility, still doesn't seem interested in reform any time soon. Some states have more clout than he has, as New York proved in getting Merrill Lynch & Co. to pay a $100 million penalty to avert criminal and civil charges. As with the lost momentum in Congress, the steam also seems to have gone out of the White House's weak drive for change.

We're like Charlie Brown and his gullibility when Lucy holds the football for him to kick -- she always pulls it back at the last minute.

Will we be wondering when we're poor and aged 75 or 85 or 90 why business as usual means that many of us get, well, taken advantage of?

When Worker Anger Boils Over, It’s Time to Sell

MNS Money, Jubak's Journal – by Jim Jubak – May 31, 2002

At some companies, management has alienated employees so badly
that you should factor it into your investment decisions. Here’s how.

(5/24/02) - So you’re angry at outrageously compensated CEOs and other executive fat cats who prosper while employees and shareholders take all the pain.

The question is, should you voice that anger and sell your shares in the company?

In ordinary times, answering this question would lead me to revisit the ancient argument between investors who believe politics and morality should help guide investment decisions and investors who believe that politics and investment shouldn’t mix.

But these aren’t ordinary times. It’s time to realize that at some corporations, the ethical behavior of management has become a business issue -- because it threatens the ability of that management to run a company efficiently.

The employee backlash calculation

People make companies go. But at many companies now in the news, employee anger at management is so intense that many of the best workers are either exiting or digging in their heels to fight their own bosses.

I’m not exactly sure how to factor that into the target price for a stock, but I’m convinced investors need to include “employee backlash” in any calculation of what a company’s shares will be worth in the future. Getting workers and executive-level managers back on the same side will determine whether some companies succeed or fail.

Some CEOs have fairly distributed the pain, clearly communicated company goals and honestly admitted mistakes. Result: the vast majority of employees remain committed to management’s vision and company goals during some pretty tough times.

Other CEOs, however, have written themselves big paychecks while firing thousands of workers; spun corporate visions that turned out to be fraudulent; and lied to cover up mistakes -- all of which has alienated employees. The energy of these employees is now going into such activities as writing resumes on company time, copying management-bashing cartoons on the company Xerox machines and filing lawsuits against directors. None of that exactly increases a company’s chance of survival.

A look at my inbox

Think I’m exaggerating the intensity of alienation at some companies? Well, take a look at my e-mail. Ever since I’ve been writing on the fat-cat pensions and the bloated paychecks of CEOs, my mailbox has overflowed with messages from workers who can’t stand their own management. Here are just some of the anecdotes -- with all identifying characteristics removed and the language paraphrased, for obvious reasons.

From what was once Hewlett-Packard: CEO Carly Fiorina couldn’t even get a majority of H-P employees to vote their shares for this merger, and now she expects we’ll help her pull these two companies together while she cuts another 10,000 jobs? Fat chance. (Actual language somewhat less polite.)

From Electronic Data Systems: CEO Richard Brown is king of the rip-off artists. He has terminated thousands of employees and will receive an annual pension of $1.2 million for life after just five years of service. After many years with the company, I have to admit I hate what is going on. As soon as I can, I’m changing jobs.

From Tyco International: We’re facing further furloughs and management’s bonuses remain untouched. It’s incredible that managers who can only meet their numbers by sending employees home without pay would be rewarded.

From Nortel Networks: It’s unconscionable to me that Nortel executives are receiving bonuses when 50,000 people have lost their jobs. They have run the company into the ground.

From Qwest Communications: Though the CEO is a bandit who collects his bonuses with no risk associated with his rewards, the board of directors is the real enemy of the people.

And finally, from an employee at AT&T: Directions to the Web site for AT&T Concerned Employees, an organization formed by AT&T workers to fight the forced conversion of their pensions to a cash-balance plan that slashed the benefits of senior workers who had been at the company for 15 years or more. (Congress recently began hearings on cash-balance plans after a Department of Labor Inspector General report showed that almost 25% of such plans shortchanged workers who left the company before normal retirement age by as much as $100,000 each.)

How to gauge the anger level

If these views represent large employee populations, management at these companies faces significant internal challenges that could derail turnaround plans. It’s hard to keep customers and find new ones if your best sales people are either walking out the door or spending all their time complaining to their peers about the CEO’s perks.

To be sure, while the e-mails I received are anecdotal evidence that there might be “people problems” at these companies, it’s impossible to tell how many employees are this angry. Is it one, or hundreds, or thousands? Quantifying the anger is key for an investor trying to decide if anger at management behavior is enough to sink a company.

So how do you judge the extent of employee resentment?

Start with the obvious -- moves that could potentially generate employee anger. In this category I’d put layoffs. Anything greater than a 10% cut deserves closer scrutiny -- call it “Strike One.” Companies that have been through multiple rounds of layoffs -- with each being billed as the final cut -- get my “Strike Two” call. Lucent Technologies and Nortel Networks both fit the bill on these grounds. Companies that have awarded big pay and perk packages to CEOs while laying off workers would get a “Strike Three” call from me.

Then review company history over the last few years, looking for thinly healed wounds that the current hard times might have reopened. At the head of this list, I’d put acquisitions that merged companies of near-equal size but with very different cultures. A lot of the worker anger at Qwest, for example, comes from former US West employees who felt insulted by disparaging remarks by Qwest management after the acquisition. They now feel even more badly treated as they’ve watched the value of US West pensions stagnate or fall. Acquisitions that resulted in benefit cuts at the acquired company are especially likely flashpoints for employee anger.

Battles found in proxy filings

Do a little reading in the company’s most recent proxy statement for the annual meeting. First, take a look at the section called “Voting issues.” This contains the standard company-sponsored proposals for the election of directors and for the appointment of auditors, as well as any shareholder-sponsored resolutions asking for changes in company policies or rules. Are there any shareholder resolutions that you’d characterize as angry and likely to rouse strong employee support? Here are two that fill the bill from the Qwest proxy:

Vote on a shareowner proposal, if properly presented, requesting that we seek advance shareowner approval of future or renewed severance arrangements with our executive officers that provide for more generous payouts than to our other managers...

Vote on a shareowner proposal, if properly presented, requesting that we disregard the effects of accounting-rule income, particularly pension credits, when determining performance-based compensation for our executive officers.

Granted, shareholder resolutions don’t necessarily correspond to workers’ issues. But I think it’s still a good bet that if things like executive severance packages are on shareholders’ minds, they’re also on employees’ radar screens. To double-check on that, look to see if the company has moved its annual meeting to a location well away from major corporate facilities. That’s often a sign that the company is trying to damp the expressions of anger at the meeting by controlling who attends. For example, Qwest is based in Denver but held its annual meeting in Dublin, Ohio, the home base of a small division.

And finally, do an Internet search looking for employee Web sites. I’ve already mentioned the one published by AT&T employees fighting changes in the company’s pension plan. EDS gives information on a wide range of lawsuits against Electronic Data Systems, including a potential class action suit by laid-off employees. Searches can also turn up such goodies as the class-action by WorldCom Group employees over losses in their 401(k) plan investments in WorldCom stock.

The power of bulletin boards

Sites such as provide bulletin boards that let company employees vent. For example, one person who claims to be a Nortel employee recently posted this message: “I have been with the company for less than a year and have experienced nothing but chaos! I've gone through at least 4 reorgs (I lost count), two projects that went nowhere, and I am on a third that may possibly go nowhere as well. So far, it's been a waste of time!”

With so much of the value of a U.S. corporation consisting of the skills, contacts and knowledge of its workers these days, it just makes sense to see how much of this intellectual property is about to walk out the door.

Companies that are facing major reorganizations, or rapidly changing markets, or increased competition -- and simultaneously face disgruntled workforces -- are at a serious disadvantage in this market. And investors should factor that into their investment decisions.

At the time of publication, Jim Jubak owned or controlled shares in none of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.

Pensions Concern Workers

The Record – by Teresa M. McAleavy – May 21, 2002

(5/16/02) – Many workers don't believe their bosses will make good on retirement payouts and strongly favor government protection of pension plans, two national surveys released today show.

Four in 10 workers said they doubt their employer-sponsored pension plans will be liquid enough to pay benefits in retirement, according to the latest surveys in the Work Trends series from Rutgers University and the University of Connecticut.

The surveys found that 31 percent of workers don't believe employers are truthful about the security of company pension plans. It's a problem bosses don't recognize: Only a fifth of American employers acknowledge that their workers don't trust them to tell the truth about pension security, or believe that they need to take additional steps to restore worker trust regarding their pension and retirement benefits.

These and other findings from parallel national surveys of 1,000 American workers and 500 employers regarding pension security and retirement are found in "Taking Stock of Retirement: How Workers, Employers, and Government Assess Pensions," and "Trust and the Economy," the latest surveys from the John J. Heldrich Center for Workforce Development at Rutgers, and the Center for Survey Research and Analysis at the University of Connecticut.

"There's a lot of distrust about pensions and retirement savings plans," said Carl E. Van Horn, director of the Heldrich Center and study co-director. "Many workers do not believe their employers will actually fulfill their commitments. Most would still prefer a guaranteed pension benefit, stronger assurances from government and employers, and greater accountability."

In the employer survey, on the other hand, bosses throughout the country said they believe their pension plans are solid.

The surveys showed other differences between how workers and employers view retirement plans.

Although workers overwhelmingly cited retirement income as something their bosses and the government should oversee with care, employers tend to see less of a role for themselves in helping their workers prepare for retirement. Fifty-six percent of employers believe that workers alone should be responsible for planning their retirement, and 38 percent of workers said they alone should shoulder the burden.

Employees also distrust top management. Fifty-eight percent believe executives are interested only in filling their pockets, even if it means forsaking the health of their corporation.

Despite all the attention the Enron retirement-plan scandal has garnered, only 25 percent of employers said they have been closely following the story, and only 19 percent of workers.

"Without restoring the trust of employees there will be greater disappointment and demoralization down the road," Van Horn said.

"Clearly, employers and employees agree that the government should oversee pension plans to ensure greater accountability. Policymakers should pay attention to that."

The employee survey was conducted from March 22 to April 27, with 1,000 telephone interviews completed with adult members of the workforce in the United States.

The margin of error associated with a survey of this size is plus or minus three percentage points. The employer survey of 501 randomly selected businesses was conducted from April 3 to April 15. Businesses with fewer than 5 employees were not included. The margin of error is plus or minus 4.38 percentage points at the 95 percent confidence level.

(SIDEBAR, page b01) Survey findings

Less than 40 percent of workers are very or extremely confident that their company's pension plan will be fiscally able to pay the benefits they expect. Nearly 80 percent of employers are very or extremely confident they will be able to meet their commitments.

Fifty-six percent of employers believe that workers alone should be responsible for their preparation for retirement. Only 38 percent of workers believe they alone should be responsible for planning their retirement.

Fifty-eight percent of workers said that most top executives at American corporations are interested only in looking out for themselves, even if it harms the corporation for which they work. Only one-third of workers believe that senior executives are interested in doing a good job for the corporation.

Fewer than a quarter of workers said they are very satisfied with the retirement and pension plan provided by their employer, the lowest level of satisfaction since the Work Trends series began in 1998.

Fixing Broken Pensions

Boston Globe – by Robert Kuttner – May 20, 2002

(5/15/02) – Remember how Enron employees found their retirement accounts ruined because company policy blocked them from selling Enron stock while the stock was crashing? Congress is currently debating pension ''reform,'' but only of the most flagrant abuses.

But there is a much bigger story here. It isn't just that some companies irresponsibly lock up workers' retirement assets in their own stock. Fewer and fewer Americans even have secure pensions.

As recently as 1980, one American worker in two had ''defined benefit'' plans. All during your working life, the company built up a pension account on your behalf. At retirement, your pension, based on your pre-retirement income and years of service, was guaranteed as long as you lived.

No longer. Only one employee in four now has such coverage, mostly in old line companies and unionized ones, and their share of the work force is dwindling.

Instead, this is the age of 401(k)s. As we saw in the Enron case, these plans can be a big problem when pension holdings are concentrated in the company's own stock and the company prevents the worker from diversifying.

But that's only the most extreme problem. Unlike tried and true defined-benefit plans, 401(k) participation is optional for the employee. The company will match a small employee contribution, say, up to 3 percent of your paycheck; if the employee wants to put in more, it all comes out of take-home pay.

There is also a tax benefit; your pension contribution is tax-deferred. But a lot of lower income employees simply can't afford to forgo the take-home pay, and thus miss out on the employer match. In addition, the employee bears all of the risk - of the stock tanking, the market declining, or just of living too long.

Basically, what has occurred is a shifting of costs and risks from employer to employee. And the same thing is happening with health care.

The next generation of health insurance will be a defined-benefit program. The employer allows the worker a certain annual sum, say $3,000 for health insurance, and the worker is free to go out and buy coverage. But if decent insurance for a family costs $6,000, too bad.

A recent landmark study by the New York University economist Edward N. Wolff for the Economic Policy Institute shows all too vividly the impact of the shift away from traditional pension plans. Although the value of the stock market increased by 248 percent between 1989 and 1998, the typical retiree was in many respects worse off.

How can that possibly be? Despite a lot of claims about the majority of Americans now being stockholders, the typical American owns very little stock. Most 401(k) plans do not accumulate enough to live comfortably on. Compared to traditional plans, they are a bad deal (except for the company.) Wolff found that in 1989, 29.9 percent of retired Americans had to live on less than half of their pre-retirement income. But by 1998 - again, after a record stock market boom - that percent of stressed retirees had risen to 42.5 percent. The typical (median) retirement wealth held by persons in the pre- retirement ages of 47 to 64 also declined, by 11 percent.

So the age of the 401(k) has been a bad deal for most Americans, this despite a booming stock market whose performance will not be repeated in the lifetimes of most retirees. Wolff writes, ''An extraordinary 15-year run-up in stock prices at a time when public policy was encouraging expanded individual investment for retirement did not enhance income adequacy for the typical household, even when the market was at its height.''

Of course, there was one part of the retirement system that worked just beautifully - Social Security. This part of the system is the ultimate defined benefit plan. It is adjusted for inflation, it is totally portable, and it covers you as long as you live, whatever happens to the stock market.

But this one part of the retirement system that isn't broken is the part that privatizers want to ''fix.'' They want to make it more like a 401(k) plan. Instead, says Wolff, we should be enhancing Social Security.

It would also be smart policy to require all employers to have decent pension plans, which are portable and which are controlled by independent trustees. But this idea, like Social Security, also requires government to aggressively defend the interests of present and future retirees. These government protections may be unfashionable, but we keep learning that they are essential.

Robert Kuttner's is co-editor of The American Prospect. His column appears regularly in the Globe.

Protection of Employee Retirement Savings

Congressman George Miller – Press Release – May 18, 2002

House and Senate Labor Committee Members
Demand Better Protection of Employee Retirement Savings

(Friday, May 10, 2002) - WASHINGTON – Responding to a recent report showing 1 and 5 cash balance pension plans illegally underpayed plan participants, leading members of the House and Senate labor committees are calling on the Pension and Welfare Benefits Administration (PWBA) and the Benefits Tax Counsel to disclose how they will ensure that employees receive their full pension benefits.

The letter was sent by Congressman George Miller (D-CA), senior Democrat on the House Committee on Education and the Workforce and Senator Edward M. Kennedy (D-MA), chairman of the Senate Health, Education, Labor and Pensions Committee. Joining in signing the letter were committee members Congressman Rob Andrews (D-NJ), and Senators Tom Harkin (D-IA) and Jim Jeffords (I-VT).

The study of 60 cash-balance plans released by the Labor Department’s Inspector General found that 13 plans have been shortchanging participants who left employment before normal retirement age by as much as 100,000 dollars per worker over their working lives. These miscalculations could cost workers a total of $85 million to $199 million a year.

“Retirement and security should not be antonyms. But when thousands of Enron employees are robbed of their pensions and the nation’s cash balance plans are cheating workers out of hard-earned retirement savings, that is exactly the message sent,” said Representative Miller. “Rapid action must be taken now to protect employee nest-eggs and return confidence in guaranteed retirement security .”

“In light of the recent scandals that have occurred concerning employee pension plans, I am deeply concerned by this new finding,” said Representative Andrews. “I am even more concerned over the complacency of the PWBA given this information. This is a significant amount of money and if mistakes have been made then they need to be fixed. ”

Following the release of the report in late March, Assistant Secretary of Labor Ann Combs, the nation’s chief pension law officer, questioned the reports findings and stalled on taking any action pending a response from the Internal Revenue System. The IRS shares responsibility with the Department of Labor in enforcement and oversight of all pension plans.

The Committees requested information on any action the IRS and the Department of Labor plans to take to address better enforcement and oversight of workers cash balance pension plans by May 23rd to assist in their review of the situation.

(Letters attached)

May 10, 2002
The Honorable Ann L. Combs
Assistant Secretary of Labor
Pension and Welfare Benefits Administration
U.S. Department of Labor
200 Constitution Avenue, N.W.
Washington, D.C. 20210

Dear Secretary Combs:

One of the most important policy questions facing the country today is protecting the retirement savings of American workers. The Enron scandal has demonstrated several weaknesses in our regulation and oversight of retirement plans that need urgent attention. We are disturbed by a recent report issued by the Office of Inspector General entitled, “PWBA Needs to Improve Oversight of Cash Balance Plan Lump Sum Distributions,” that found that cash balance plans were underpaying workers millions of dollars of hard earned pension benefits.

In addition, we are especially troubled by the portion of the report that shows the Department’s failure to implement the IG’s recommendations that the PWBA provide additional oversight and enforcement of cash balance plans. As the nation’s chief pension law enforcement official, we believe that you have a responsibility to ensure that pension plans do not breach their fiduciary duties to workers and that workers receive all the benefits to which they are entitled.

The IG report reviewed the conversion and distribution processes of 60 traditional defined benefit plans that had been converted to cash balance plans. According to the report:

“in 13 of those 60 plans we found that workers who left employment before normal retirement age did not receive all the accrued benefits to which they were legally entitled; being underpaid an estimated $17 million each year. Applying the same estimation model used in our judgmental sample to the estimated 300 to 700 defined benefit plans that have converted to cash balance plans, we estimate that workers may be underpaid between $85 million and $199 million annually.”

To assist in the Committee’s review of this issue, we request the following information on the steps taken by your Department to fulfill this important commitment:

  • A description of the enforcement efforts that PWBA is taking or anticipates taking to protect participants’ benefits in cash balance pension plans.

  • A description of the specific enforcement action that PWBA is taking or anticipates taking against the 13 plans with forfeitures identified by the Inspector General.

  • A description of the steps that PWBA is taking or anticipates taking to develop guidance for pension plan administrators in calculating participants’ accrued benefits in cash balance pension plans.

  • Copies of any Department of Labor legal opinions concerning its ability to contact pension plans to ensure the accuracy of pension plan calculations.

  • Copies of any communications between PWBA and the Department of Treasury or the Internal Revenue Service on this matter.

Please provide this information to the Committee by May 23rd . Thank you for your prompt attention to this request.


Senator Edward M. Kennedy
Senator James M. Jeffords
Senator Tom Harkin

Representative George Miller
Representative Robert E. Andrews

cc: The Honorable Elaine L. Chao, Secretary of Labor

The letter was also mailed to:

The Honorable William Sweetnam
Benefits Tax Counsel
Office of Tax Policy, Room 1322
U.S. Department of Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Some Pensions Shortchange Workers

Associated Press – by Curt Anderson – May 8, 2002

WASHINGTON (AP) - Workers across the country could be shortchanged by almost $200 million a year because hundreds of companies have switched from traditional pension plans to arrangements targeted at a younger, more mobile work force, the Labor Department says.

Almost a quarter of the companies converting to the new cash balance plans were found to be underpaying people who left before normal retirement age. The Labor Department inspector general's office estimated that the amounts underpaid ranged up to $55,629.

The findings released Tuesday provided fresh grist for critics of cash balance plans, who contend they are unfair to older workers because retirement benefits are frequently less than had been promised under the traditional plans. The conversions have affected 8 million workers and involve $334 billion in pension assets.

"The time has come for the feds to step up to the plate and start enforcing the age discrimination laws to protect the pensions of American workers," said Rep. Bernie Sanders, I-Vt. "Workers should not have their pensions reduced just because they are older."

Under a traditional defined benefit plan, workers accrue most of their benefits toward the end of their careers. Benefits are usually based on a worker's years with the company and on their average salaries in later years — when they presumably make the most money.

Cash balance plans are more front-loaded: the company pays a fixed percentage of the employee's annual salary into retirement each year and workers build up money evenly throughout their careers. These plans are also easily moved from one job to another.

The new plans drew heavy criticism in 1999 and 2000 when several major companies, notably IBM Corp., converted to them. Companies defended the moves as crucial to retaining any worker pensions and rejected claims of age discrimination; efforts failed in Congress to require detailed disclosure of the impact conversion has on individual workers.

The Labor Department inspector general's analysis of 60 companies that converted to cash balanced plans found that all of them adequately protected benefits from traditional plans. But in 13 cases, or 22 percent, workers who left before normal retirement age didn't get benefits to which they were legally entitled.

Assuming that between 300 and 700 traditional plans have been converted, the analysis estimated that these workers are being underpaid between $85 million and $199 million each year — a violation of federal retirement laws.

"Under any sampling or targeting method, statistical or judgmental, this is a disturbing finding," the inspector general analysis said.

These underpayments are occurring most often because cash balance plan administrators make errors in projecting participant benefits — specifically, they fail to compute the present value of the retirement benefit at normal retirement age as required by the law. Others incorrectly figure cost-of-living allowances and wrongly calculate the opening amounts in the plans.

James Delaplane, vice president for retirement policy at the Association of Private Pension and Welfare Plans, said the issue of properly projecting benefits, known in the industry as "whipsaw," has been the subject of federal court cases and probably eventually will require Congress to act.

"It's a pressing issue that nearly everyone has recognized," Delaplane said.

To address the problem, the analysis recommended that the Labor Department agency tasked with enforcing pension law for 200 million participants — the Pension and Welfare Benefits Administration — beef up its enforcement regarding cash balance plans and take specific actions against the 13 companies identified by the inspector general. Names of those firms were not publicly released.

Ann Combs, the assistant labor secretary for pensions, said in a letter to the inspector general that her office would take "an appropriate course of enforcement action" against the 13 specific companies. But she raised questions about the methods used to arrive that the $199 million figure after analyzing only 60 cash balance conversions.

"Unless you were able to undertake a broader survey of the problem ... we cannot commit to redirecting our enforcement resources" to this issue, Combs wrote.

Sanders, who represents hundreds of IBM employees, said he would introduce legislation soon to require that the federal government do a better job of enforcing pension laws. Combs added that the Labor Department would work with the IRS and Treasury Department to determine if "additional guidance" is needed to help cash balance administrators make more accurate calculations.

IBM Pension Lawsuit Update

Employee Advocate – – May 7, 2002

Janet Krueger has posted an update on the Cooper v IBM pension lawsuit. One interesting development is that the class action suit is neither “opt-in” nor “opt-out.” The judge is providing all class members with injunctive relief; everyone is included automatically!

Click the link below to view the lawsuit update:

IBM Pension Lawsuit Update

To view a report from last year, click the link below:

IBM Pension Lawsuit 2001

Move to Cash Balance Pension Plans Slowing

Employee Advocate – – May 4, 2002

A Watson Wyatt press release provided numbers showing that the big rush to cash balance pension plans is subsiding. Only one company in the Fortune 100 has moved to a hybrid pension plan since 2000!

Evidently companies are learning that when they lie to employees and break long-term commitments, there is a price to be paid. The millions of dollars confiscated from the employees cannot buy back their reputations! Buying newspaper ad space will not save them either.

Watson Wyatt claims the pension conversion are not really designed to save employers money. Remember, this hot tip comes from a company that makes money from selling cash balance conversions!

The firms William M. Mercer and Watson Wyatt stirred up a hornet’s nest when they devised the IBM cash balance conversion. William M. Merced concocted the Duke Energy cash balance pension conversion.

How Losses Become Profits

New York Times – by Floyd Norris - April 30, 2002

(4/26/02) - In the land of executive compensation, there is nothing like being paid for profits that you can be sure will be counted, even if they do not exist. Why take chances with real earnings?

Last year, Verizon Communications reported net income of $389 million after taking losses for a variety of things, among them investments in Metromedia Fiber Network, a company whose shares have plunged from a peak of more than $50 to less than 5 cents. Top officers' bonuses were reduced but not eliminated. Things could have been even worse for Verizon and its bosses. The net would have been negative, save for $1.8 billion in income the company was able to report from its pension plans.

The only trouble is that Verizon's pension plan was really swimming in red ink. Dig through the company's annual report, and you will find that the pension funds had a negative return on investment last year, dropping $3.1 billion. And that is before considering the costs of pension benefits.

So how did billions in losses turn into nearly $2 billion in profits? Verizon assumed that its pension plans would earn profits of 9.25 percent last year, and it reported income as if that assumption were true, something it was able to do under the current ridiculous accounting rules. Its earnings would have been even better had it assumed a 9.5 percent return, as General Electric did, or a 10 percent return, as I.B.M. did. In fact, both those companies lost money in their pension plans last year, as did most big companies.

A study by Milliman USA, a benefits consulting firm, found that in 2001 the reported results of 50 large companies included $54.4 billion of profits from pension fund investments. In fact, the pension funds lost $35.8 billion from investments last year.

The losses are buried in annual report disclosures that few can understand. Harvey L. Pitt, the chairman of the Securities and Exchange Commission, has promised to make annual reports more understandable. This would be a good place to start. Even better would be a new accounting rule requiring actual results to be used.

The theory of the current rule is that over time, all this will balance out — that pension income will be understated in the good years, as it was for most companies in the late 1990's, and overstated in the bad ones. But what has resulted is highly misleading.

Shareholders have started to become upset, particularly because many companies include the phantom income in determining whether executives qualify for performance bonuses. At Verizon's annual meeting this week, a proposal to bar the consideration of pension income from bonus calculations was supported by 43 percent of the shares.

Fred Salerno, Verizon's chief financial officer, says there is no way to know how much the pension income contributed to the bonuses because a different formula would have been used if it had been excluded. He notes that the company knew the approximate pension income it would report last year when it set the formula.

Executives might do better in the future if they stopped considering reported pension income when bonuses are calculated, simply because pension income is headed lower. The complicated pension rules will force companies to report poorer results this year because last year's reality was so bad. And John Ehrhardt, a principal at Milliman, says that auditors in the post- Enron era may force companies to reduce their optimistic assumptions.

Investors would do well to study the pension disclosures in this year's crop of annual reports. They show that many plans that seemed to be overfinanced a couple of years ago no longer are. Pensions are going to go back to costing companies money — both in reality and, soon, even in their published financial statements.

Participant As Plaintiff

Employee Advocate – - April 24, 2002 interviewed Plaintiffs’ attorney Marc Machiz about how employers are leaving themselves wide-open for pension lawsuits.

It is no secret that many employers are putting a pension squeeze on baby boomers. Mr. Machiz feels that many of the pension conversion victims are reverting back to the radical ways of the ‘60 and ‘70s.

The younger employees are likely building up steam and will likely lash out at their employers as they begin to reach retirement age.

Cash Balance Audit Conclusions

Employee Advocate – - April 24, 2002 reported that a government audit revealed that cash balance conversions may shortchange early retirees. An audit was not really necessary – all they had to do was ask the employees!

Only 60 conversions were audited, but 13 of them shorted employees of retirement money.

Pensions - Page 2 - 2002