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Pensions - Duke Energy Employee Advocate

Pensions - Page 2 - 2000

"Until the great mass of the people shall be filled with the sense of responsibility
for each other's welfare, social justice can never be attained." - Hellen Keller

Cash Balancing Acts

Actuarial Update - May 2000

The Academy is working hard to correct misperceptions about the actuary's role that have arisen from the cash balance pension conversion controversy, Academy President-Elect Larry Johansen old a standing-room-only crowd of about 1,450 pension actuaries in late March.

"Because Congress, regulators and the news media continue to scrutinize cash balance conversions and the role of pension actuaries, this issue is a top priority for the Academy's public policy and professionalism activities," said Johansen.

The president-elect's comments came during the first of the EA meeting's two general sessions on cash balance issues. The sessions put the spotlight on a wide spectrum of views about cash balance plans and conversions. The sessions also reflected how the cash balance controversy - and the actuarial profession's response to it - has broadened since it first emerged last year.

The controversy was initially sparked by news reports about taped comments pension actuaries and lawyers had made at professional conferences. (The comments included remarks about how employers could use cash balance conversions to obscure benefit cuts.) But the general sessions at this year's EA meeting covered not only such profession-specific topics as the actuary's role in cash balance conversions, but broader issues that ranged from age discrimination questions to the influence of labor force demographics to legislative proposals that would virtually mandate plan choice in a conversion and prohibit "wear-away."

During the second general session, Leslie Kramerich, acting assistant secretary in the Labor Department's Pension and Welfare Benefits Administration (PWBA), gave an update on her department's review of cash balance conversions. She said PWBA and other federal agencies are helping the Equal Employment Opportunity Commission examine potential age discrimination violations related to cash balance conversions.

However, she said, it was hard to predict when federal agencies would finish their review and take a stand on the issue. A large number of comment letters to the IRS are being studied, she said, and the Labor Department is continuing to receive numerous phone calls from frustrated cash balance plan participants.

In some of those calls, Kramerich said, participants are asking what can be done if employers, consultants, lawyers, or actuaries try to mislead employees about what happens to their benefits in a cash balance conversion.

That question, she said, "has struck a real and deep chord in many of the people we're talking to and continuing to hear from. They've estimated the change in future benefits to expect, but many we speak to perceive the way in which that was communicated to have added insult to injury.... There's a strong feeling of distrust, and it affects just about all of us that are part of the pension system."

Ed Burrows, a member of the Academy's Pension Practice Council, urged pension actuaries to take a leading, proactive role in the debate over enhanced disclosure. Such a role will help pension actuaries remove the cash balance "tar and feathers," he said.

However, he added, "our reputation is probably at an all-time low as pension actuaries. Make no mistake about that."

Class Action Lawyers Discover ERISA

Plan Sponsor News - 5/12/2000

"Win or lose, you've lost, as plan sponsors face increasing attacks from class action attorneys who are turning their attention to ERISA, warn ERISA lawyers, among them Sherwin Kaplan, until recently a top solicitor at the Labor Department."

"'All companies large and small are at risk for such suits,' says Matthew Newman, an attorney with Mansfield, Tanick & Cohen in Minneapolis. 'Disclosure lawsuits can affect any employee benefit, not just pensions.'

"'How about just being honest?' asks Newman. 'Have candor and honesty. If you've lied or misrepresented, you'll be caught and sued...'"

Hey, it's just crazy enough to work!

Private Pensions At Risk

Intelligent Capital - May 11, 2000

"A ... problem with private pension benefits is occurring at the big blue-chip companies famous for offering generous 'defined-benefit' pensions. These traditional plans -- which are rapidly disappearing in favor of less costly 401(k) plans -- typically guarantee retirees a fixed monthly income based on years of service and on average annual salary during the years just before retirement. Combined with Social Security, career workers often end up with a predictable 60% to 80% of pre-retirement income.

"That was then. Over the past five years -- even as the raging bull market has ballooned the surpluses in most pension trusts -- an increasing number of companies have converted their traditional pensions into so-called 'cash-balance' plans. Plans covering nearly one-third of the 30 million workers who remain in defined-benefit pensions have been converted -- sparking a storm of protest among older workers who have lost up to half of their anticipated retirement benefits.

"Unlike traditional pensions, which are most generous to career workers who stay for many years until retirement age, cash-balance plans look a lot like 401(k) plans. Companies typically contribute between 4% and 7% of a worker's pay each year into an individual cash-balance account. Because the benefit is more visible and accrues more evenly over a career, employers argue that cash balance plans help them recruit younger and more highly skilled workers who do not expect to stay with the company for 20 or 30 years. When workers leave, they can roll the balance into an Individual Retirement Account."

With almost all cash balance plans, the employee can roll the balance into an IRA when he leaves the company. That is supposed to be the big drawing card for these plans. With Duke Energy's plan you cannot even do that! First, you must work at least 5 years to earn ANY benefits. Leave before that and you get nothing. Even if you have 5 years of service and leave before age 55, you do not get to take the balance with you. It stays with Duke Energy until you become 55. If you leave Duke Energy at age 25, your money will stay with Duke Energy for 30 more years! What's so bad about that? You will be drawing cheap interest rates while the company will be investing the money for potentially greater returns. Duke Energy pockets the difference! So, for 30 more years, Duke will profit even more off of your earned money. Their profit is not guaranteed, but historically, equities have outperformed bonds. The company will be making money off of you after you are gone and making money off of everyone who stays with them. If you were allowed to take your earned pension money with you, the company would then have zero control over it. If your money if left with the company, they have 30 more years to plan and scheme of a way to get into it. Do you think that is absurd? Lobbying to change a law to favor Duke is all it would take. As long as Duke Energy has control of you money, they can find endless ways to tinker with it. A few years ago did you think that Duke would help themselves to a large chunk of your pension? Sleep well for the next 30 years.

"Each account is credited with an annual rate of return, which is generally pegged to the interest paid on a risk-free U.S. Treasury bond. Unlike 401(k) accounts, however, ... cash-balance accounts are 'hypothetical' -- the company invests all the money through a pooled trust and keeps any investment returns in excess of the roughly 6% interest rate credit.

"So why are older and long-tenure workers so upset? Companies manage to both shave costs and help new hires to accumulate benefits faster by cutting benefits for mid-career employees. While benefits already earned cannot be taken away, many longtime employees have their pension benefits frozen -- some for as long as a decade -- until their hypothetical 'cash balance' under the new plan exceeds the benefits already earned under the old plan. This 'wear away' feature has led to allegations of age discrimination now being investigated by the federal Equal Employment Opportunity Commission."

It is said that "benefits already earned cannot be taken away." But that turns out to be just a play on words. Most people will lose money. It does not matter if it is called wear away, take away, or robbery on the highway - your money is taking a trip, never to return. The EEOC is investigating the possibility of age discrimination against SOME employees. But ONLY the employees who have requested it. (Those who do not complain must be happy with the cash balance plan.) To have your case investigated, call 800-669-4000 today. There is no charge. This is a service of The United States Federal Government. You will not find this offer in China. If you are ever going to take any action to preserve your future quality of retirement, now is the time. When you are retired and drawing pitifully small pension checks, it will probably be a tad too late to complain.

"The poster child for critics of these new-wave pension plans is IBM -- a company once famous for coddling its career employees.

"'The whole thing made me so mad that I quit,' said Janet Krueger, who worked at IBM for 23 years. Krueger has helped to organize an association of thousands of current and former IBM employees that has turned IBM's broken pension promises into a national crusade. Their tactics of striking back include town meetings, Blue Shirt Tuesdays, a union-organizing drive, congressional hearings and a resolution that won 25% of the vote at IBM's annual stockholders meeting last month.

"IBM employees are not alone. AT&T, Bell Atlantic, MCI WorldCom and Xerox are among scores of companies that have converted to cash-balance, in most cases to both cut costs and to compete for younger employees who prefer more portable pension benefits.

"'We believe it's age discrimination,' explains Rep. Bernard Sanders (I-VT), who has sponsored a bill that would make what IBM did illegal. 'Imagine waking up one day, after working for a highly successful company for 15 or 20 years, and learning that your pension has suddenly been slashed by 40%. You would feel betrayed.'"

Whither Wear-Away?

Watson Wyatt Insider - 2000

"The cash balance debate being played out in the media and Congress has focused in part on the concept of 'wear-away,' a method of transitioning from one benefit program to another. The popular consensus seems to be that wear-away is a problem that must be fixed. However, most plan sponsors don't view wear-away as either positive or negative, but simply as a necessary step in any benefit transition."

And, just who is offering all this unbiased advice? Only the people who make money from selling cash balance conversions! These very people did a number on the IBM employees. Ask any IBM employee how they like their cash balance plan! Plan sponsors are not going to view the wear-away as negative after all the money lost to wear-away usually goes into their pocket. They dare not call the wear-away positive, because they do not want you to know just how much money they are taking from you with it.

"Wear-away occurs when an employer changes a plan feature that affects participants benefits: the benefit formula, the definition of compensation, the limit on compensation or benefits, or the plan factors for determining any optional form of benefit. Regardless of the change being made, all participant benefits already accrued including optional benefits must be protected. Such plan changes occur routinely, with no disruption in the continued accrual of benefits for participants or in the administration of the plan for the sponsor. For some changes, however, there may be a period of time where benefits payable at certain ages or in certain forms may not increase for some employees. The protected benefit is said to be 'worn-away' by the accrual of benefits under the new benefit program."

Your retirement future is worn-away - you lose money. Your loss is usually the company's gain. Firm such as Watson Wyatt get a cut of the action for "helping." A very well known politician has just stated that the testimony that he gave was "not false as he defines that term." The position of Watson and Wyatt must be that the wear-away is not highway robbery "as they define the term."

"Wear-away can also occur when a traditional defined benefit plan is converted to a hybrid plan design, such as cash balance or pension equity. A traditional defined benefit plan determines and communicates its benefit in the form of an annuity. In a conversion to a hybrid plan - which determines and communicates its benefit in the form of a lump sum - an initial lump sum amount has to be established. There is a widespread - but very much mistaken - belief that sponsors converting to a hybrid design commonly establish an initial lump sum worth less than the present value of the participant's normal retirement benefit. If that were the case, affected participants would have to work for quite some time simply to allow the lump sum benefit under the new plan formula to catch up to the benefit already accrued before the conversion."

How does 7 years or longer grab you for working with no pension accruals?

"Retirement plans are designed to serve employers as well as employees. Most employers are sensitive to their employees' retirement planning and provide valuable transition benefits during a conversion."

Oh, it is serving the employer very well. But, most of us do not get a third of a million dollars added to our initial cash balance. Money is only taken from our accounts taken by wear-away. Who is interested in "valuable" transition benefits? Only an idiot would be happy if someone took a dollar from him and gave a nickel back as a valuable transition benefit!

Actuaries are now under investigation for their part in the great pension rip-off. They would certainly like to explain away any guilt on a web site. They do not want to try to explain it away before a judge or Congress.

The Forbes 500s: Benefits and Recruitment

Forbes - April 11, 2000

Duke Energy was not included in the Forbes 500s Benefits and Recruitment survey. They also did not make "Business Ethics'" 100 Best Corporate Citizens in March 2000. Duke Energy did not rate in the 100 Best Companies to Work For by "Fortune Magazine" in 1999 either. We suppose the company trumpet blowers, who herald each fluff article, will be on "standby pay."

The online pension activist, Lynda French

Money - April 2000

"Lynda French didn't plan on becoming an employee-rights activist. But then IBM got in the way of her retirement.

Not too long ago, French was a die-hard IBMer. A software analyst, French had spent 22 years of her career at Big Blue; her husband Tom (whom she met on the job) was an IBM veteran with 26 years of experience. After such lengthy service, the Austin couple were looking forward to a comfortable retirement within the next 10 years.

"But then IBM announced last May that it was converting its traditional pension into a so-called cash-balance one. To French, the ramifications were initially unclear. "I didn't know what a cash-balance pension was," she says. So she hit the Internet to investigate.

"There she discovered that IBM was part of a larger trend. Over the past few years, hundreds of the nation's largest companies have transformed their traditional plans (in which employees earn the bulk of benefits during their last few years of work) into cash-balance plans (which allow workers to earn benefits at a steadier rate throughout their careers). For some employees, it is actually a more flexible path to retirement (not coincidentally, it also saves the companies tens to hundreds of millions of dollars a year). But once all the math is done, workers in the middle of their careers often discover that they've lost a huge percentage of their benefits. Her site, along with an IBM-employee club on Yahoo!, fomented a revolt that generated so much attention that the Equal Employment Opportunity Commission, the Labor Department and the IRS are investigating whether the way companies have implemented these plans is legal. The IRS, in fact, has stopped approving company applications for cash-balance plans, pending the outcome of its review."

Lynda French is a wonderful lady who had blown a hole in the good old boys back room pension deals. Her web site,, is highly recommended. There is a link to her web site below:

Pensions - Page 1 - 2000