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1999
Pensions

On 11/20/99 in an article in the "Charlotte Observer," "Utility Workers May File Grievance," Duke spokeswoman Guynn Savage rolled out a "Money" magazine article ranking Duke's benefit plan. That seemed like a very weak defense. Then on 11/22/99, Mike Tuckman felt the need to roll out the same weak defense in "Team Nuclear." On 11/30/99, in the "Noon Report," Rick Priory rolled out the "Money" magazine article to explain away everything.

Well, if magazine articles are going to be the savior of Duke Energy, what about the Fortune Magazine article, "100 Best Companies to Work For"? Duke Energy DID NOT EVEN RATE!

Let's see if all of Duke's senior management and spokespeople keep pointing to this article. A quote from the article, "With labor in short supply, these companies are pulling out all the stops..." We keep reading about labor being in short supply. Judging by Duke's actions over the past several years, they are oblivious to the fact. All Duke has done for its employees is TAKE, TAKE, TAKE.

Duke takes insurance benefits on a regular basis. The biggest take of all was gutting the pension program. But, that was not enough. They took away retirement insurance benefits also. Then, they took a week of vacation from the older employees. (Another matter for the EEOC?) Being able to carry over unlimited vacation was not a tremendous benefit, but they took it anyway. Then, for added measure, they took two holidays from most employees. At least one subsidiary even effectively lost sick pay.

If this is the treatment that we get during a labor shortage, what is in store for us during an over supply of labor? Some employees of these 100 companies get stock options. SOME of Duke's employees get stock options. Rick Priory has 4.495 million dollars worth of options, per a "Charlotte Observer's" estimate. Another quote seemed to fit Duke better, "More than a few 'Chainsaw' types still run companies, and many CEOs still can't manage to say thank you, let alone offer stock options." We are not asking for some of the perks that the better companies give their employees: dog walking service, Christmas card hand addressing service, free gymnasiums, free home repair service, etc. But, we would like to have the retirement pension that we have been promised for decades.

Employee Benefits

Employees of several large corporations, irate about cash balance pension conversions, sent the letter below to The United States Department of Labor. The letter was to support the investigation of actuaries for their part in the pension scandal. Be sure to read the comments made by actuaries at the end of the letter.

Update: An ongoing dialog between The Department of Labor and the employees developed. The July 2000 invitation to the employees to meet with Department of Labor and U. S. Treasury Department officials in Washington D. C. was a direct result of this letter.

December 6, 1999

The Honorable Alexis M. Herman
Secretary United States Department of Labor
200 Constitution Avenue, NW
Washington, DC 20210

Dear Secretary Herman:

We are writing to thank you for agreeing to review whether pension consultants have acted inappropriately in promoting the use of cash balance and other "hybrid" plan conversions to "mask" reductions in pension benefits.

We commend Representative Ken Bentsen and the other members of Congress who have previously requested your investigation into this matter. This kind of behavior from pension professionals is shocking. Employees who are adversely affected by cash balance conversions are typically older and/or tenured workers who have dedicated many years of service to their employers. Often these employees have made a conscious decision to accept a lower salary in return for the promise of a more generous pension.

Words cannot describe the feelings of employees when they first learn that some of the top pension consultants in the country have callously advocated actions designed to obscure the loss of expected benefits. It is bad enough when employers reduce pension benefits. To try and hide the reduction is unconscionable. Denying employees even the opportunity to adjust their retirement planning is not a game to be laughed at during conferences of actuaries; it is a grave injustice, which must be stopped at once. We hope that you will do everything within your power to stop it and discipline anyone who has violated the rules and regulations which govern their conduct.

In conducting your review, we request that you consider two important points. First, in addition to the violations of actuarial codes of conduct which Representative Bentsen noted, it appears that at least some individuals may have also violated federal law. Specifically, 20 C.F.R. part 901.31(c), regarding "Disreputable conduct" of enrolled actuaries, provides that the enrollment of an actuary may be suspended or terminated if it is found that the actuary has engaged in conduct evidencing fraud, dishonesty or breech of trust. The prohibited conduct includes "Knowingly making false or misleading representations, either orally or in writing, on matters relating to employee benefit plans or actuarial services, or knowingly failing to disclose information relative to such matters."

We are not pension experts, lawyers, or actuaries, but from our interpretation of the above regulation, it appears quite likely that an actuary who advises employers to hide or mask benefit cuts has breached these regulations, and we believe this raises the misdeeds of which Congressman Bentsen complained to a higher level of wrongdoing than even a breach of a professional code of conduct. We urge you to consider terminating the enrolled status of any actuary who has advocated, designed or facilitated pension plans which an employer has then used to mask benefit cuts. In our view, any professional found to have violated 20 C.F.R. part 901.31(c) lacks the qualities contemplated by the regulation.

Second, we also urge you consider the related issue of breaches of employer fiduciary duty, i.e., whether any of the employer has followed the wrongful advice of any of the benefits consultants or actuaries, and taken action to hide or mask a cut-back in future benefits. As you know, a number of employers have converted their pension plans to cash balance and/or other 'hybrid' plans after receiving the advice of the very consultants who were the subject of Congressman Bentsen's complaint. It does not seem illogical to assume that at least some of these employers did so for the reasons their consultants were advocating. Following the Supreme Court's decision in Varity v. Howe, 516 U.S. 489 (1996), an employer who knowingly deceives employees about their retirement benefits in order to save the employer money may have violated the fiduciary obligations imposed by ERISA. We also ask you to investigate any potential fiduciary breaches which may have resulted from the inappropriate advice of the consultants in question and/or inappropriate intentions and actions of the employers.

Attached are a number of statements made by actuaries, which we believe deserve scrutiny. We hope you will investigate each of these thoroughly, as well as any corresponding breach of fiduciary duty by an employer.

Because of the importance of this matter, we would like the opportunity to meet with Assistant Secretary McGahey at his earliest convenience to discuss with him our first-hand experience concerning cash balance and "hybrid" plan conversions. Accordingly, a representative of our coalition will be contacting him to request a meeting within the next few days. We also request feedback and updates on our prior meetings with DOL staff members, and the employee complaints previously discussed with and/or sent to the DOL in New York and Washington, DC. Thank you, Madam Secretary, for all your efforts on behalf of all affected employees everywhere, and particularly your willingness to investigate thoroughly this very serious and troubling matter. Please do not hesitate to let us know if we may provide any information which might be helpful to you as you undertake your effort to ensure appropriate pension practices consistent with the purposes of ERISA.

Sincerely,

Janet Krueger
Jkrueger@dhagroup.com
IEBAC (IBM Employee Benefits Action Coalition)
www.cashpensions.org

Janice Winston
janicewinston@yahoo.com
Bell Atlantic Employees Coalition for Retirement Security (BAECRS)
www.bapensions.org

Donald W Shuper
dshuper@halcyon.com
Boeing Retirees on the Line (BROL)
www.halcyon.com/dshuper/

Jim E. Matthews
aatlas@perigee.net
Duke Energy Employees
dukeemployees.8m.com/

Donna Fry
dmfry@hotmail.com
AT&T Global Network Services Employees

Thomas E. Ainsworth
teainsw@hotmail.com
SBC/Pacific Bell Employees

Enclosure (actuary clips/quotes)

1. 1998 ENROLLED ACTUARIES MEETING

(Excerpts):

Amy C. Viener - William M. Mercer, Inc.

Keith S. Williams - Watson Wyatt Worldwide

Ms. Viener: This is an introductory lecture. We wanted to have it because, at most of the conferences lately, they assume that everyone has dealt with cash balance and pension equity plans, and they just jump right into the really complicated issues. If you have never seen one it is pretty over your head and confusing, . . .".

** ** ** **

Mr. Williams: ". . . I've been involved in cash balance plans five or six years down the road and what I have found is that while the employees understand it, it is not until they are actually ready to retire that they understand how little they are actually getting. Ms. Viener: Right, but they're happy while they're employed.

2. 1986 ANNUAL MEETING OF THE CONFERENCE OF CONSULTING ACTUARIES:

(Excerpts)

Gary Hallenbeck - Towers Perrin

Mr. Hallenbeck: "The third group of companies that ought to be looking at a cash balance plan would be those companies that are looking to reduce or at least control pension cost in the future."

"The switch to the hybrid approach in effect represents converting the final pay play to a career pay plan with its inherent greater control of future costs but without the negative aspects of having to communicate that kind of change to the employee population. Needless to say, the way the plan is presented to employees looks so dramatically different than the defined benefit plan that the employees are used to that, and the change can be used to mask a benefit cutback." "Earlier I indicated one of the situations where a company might want to consider this approach is when it can be used to mask a benefit cutback."

3. 1987 ANNUAL MEETING OF THE CONFERENCE OF CONSULTING ACTUARIES:

(Excerpt)

Joseph H. Edmonds

Mr. Edmonds: "...[i]t is easy to install a cash balance plan in place of a traditional defined benefit plan and cover up cutbacks in future benefit accruals. For example you might change from a final average pay formula to a career average pay formula. The employee is very excited about this because he now has an annual account balance instead of an obscure future monthly benefit. The employee does not realize the implications of the loss of future benefits in the final pay plan. Another example of a reduction in future accruals could be in the elimination of early retirement subsidies."

4. KWASHA LIPTON, Letter to Onan Corporation (July 1989):

(Excerpt)

"A Cash Balance Plan has many nice features which have been widely discussed (we enclose three newsletters on the topic). One feature which might come in handy is that it is difficult for employees to compare prior pension benefit formulas to the cash balance approach."

5. MEETING OF THE SOCIETY OF ACTUARIES, June 1996:

(Excerpt)

Norman W. Clausen - Kwasha Lipton

Mr. Clausen: "These plans [cash balance plans] help facilitate benefit changes. If you decide your plan's too rich and you want to cut back, and you only want to do that for the new hires, changing to a totally different type of plan will let you do that without being obvious."

6. ANNUAL MEETING OF THE SOCIETY OF ACTUARIES, October 1998:

(Excerpt)

Ira G. Kastrinsky - Aon Consulting

William Torrie - Pricewaterhousecooper

Mr. Kastrinsky: "The basic approach here is that we're going to change the form of their pension plan. Yes, if I have a 1.0% final average pay plan and I reduce that 1.0% to 0.8%, everybody knows -- you don't have to be an actuary to figure out -- that you just had a benefit cutback. That's kind of obvious. Um, if you give them something different, it isn't as obvious."

"So, the point is that we try to give them something different, to, obviously, um, try to get away from the fact that we are gonna have to cut back their benefits, um, and, in some respects, give them something that perhaps they might view to be more valuable than what they currently have." ** ** ** ** Mr. Torrie: "But, let me just discuss two plan redesigns we did and cash balance could be involved in both. As Ira Kinda alluded to in one of his comments was that converting to a cash balance plan does have an advantage of it masks a lot of the changes and it allows you a lot more flexibility than you might otherwise see."

"The reason for these two examples is it kind of highlights one of the original thoughts with cash balance plans is that it allows you to covert other plans to a plan that, in general, is simply more easily understood by employees, more frequently communicated to employees--most employees didn't appreciate the two defined benefit plans that they had -- and allows you to do it in a way which allows a conversion with doesn't highlight, you know, I was getting 1.25% of pay and now I am only getting 1.00% of pay. There is very little comparison that can be done between the two plans."

Pension Revolt Catches Fire

Mr. Smith Goes to Washington

In recent years, hundreds of employers across the U.S., including Boeing, IBM, AT&T Corp., Bell Atlantic Corp., Eastman Kodak Co., Aetna Inc., and CBS Corp., have sought to reduce expenses and attract today's highly mobile workforce by converting their retirement plans from traditional defined benefit pension plans to cash balance plans. A maelstrom of controversy has erupted as a result, spawned by concern that employers' conversion to cash balance plans unlawfully discriminates against older workers. Politicians and lawmakers across the country have begun weighing in on the issue, and in November 1999, the Department of Labor posted on its internet site answers to plan participants' most common questions regarding these plans. It is likely that the debate over conversion to cash balance pension plans will continue for the next several years, either until a legal challenge to pension plan conversions reaches the U.S. Supreme Court, or until Congress passes legislation regulating the practice.

By now you should know the key phrase is "reduce expenses." "Attract today's highly mobile workforce" is thrown in only to disguise the true purpose of the conversion. The only thing a cash balance plan is likely to attract is flies and lawsuits.

Who cares if an employer converts to a cash balance plan from a traditional plan?

For starters, older workers care, and complaints about employers who have forced older workers out of their prior pension plans into cash balance plans has resulted in heavy criticism of those employers in the media. The issue has also captured the attention of a number of federal agencies, including the Department of Labor ("DOL"), the Internal Revenue Service ("IRS"), and the Equal Employment Opportunity Commission ("EEOC"), all of which are currently investigating whether conversions from traditional pension plans to cash balance plans violate the federal Age Discrimination in Employment Act ("ADEA"). The DOL has empanelled a working group to review the issue and make recommendations to the Secretary of the DOL, the EEOC is investigating age discrimination charges filed by employees who had participated in traditional pension plans that have been converted to cash balance plans, and the IRS has recently solicited public comment on the ADEA implications of pension plan conversions. Legislation recently introduced in both houses of Congress would, if passed, prohibit employers from forcing employees who participate in a traditional pension plan to switch to a cash balance plan. President Clinton has expressed preliminary support for alternative proposed legislation which would strengthen disclosure requirements when employers intend to convert to cash balance plans, by requiring employers to provide employees with at least 45 days' advance notice of plan conversion.

Disclosure laws are nice, but alone, they are about worthless.

Employee Advocate comments are in italics

The Advisory Committee on Employee Welfare and Pension Plans made this report on 11/10/99. Here are some findings:

Unless adequate protective measures are included, the employees that are likely to be at a disadvantage under a cash balance plan (in comparison to a traditional plan) are those who, at the time the cash balance plan is introduced, are nearest retirement and who therefore have the greatest interest in and need for retirement benefits.

When a pension plan is converted to a plan design that gives lower benefit accruals to older, longer-service employees, without appropriate transition protections there is a takeaway - a loss of expected future benefits - which is felt much more sharply than if the employer were simply adding a new benefit that tended to offer more to younger employees.

The loss that older employees experience in some cash balance conversions is especially profound in companies that had previously invested the most in promoting their traditional pension plan to employees as a valuable component of the employees' compensation, encouraging employees to build careers in reliance on what they viewed as a retirement income promise.

That's us! Duke-Energy has put in much lip service over the years telling employees not to be concerned if Duke did not pay top wages. We were not supposed to be concerned with that; we were directed to look at our "total compensation package." Duke Energy's nifty enhanced early retirement program was supposed to offset any shortfalls in salary. That's why we were sent pamphlets each year entitled "Your Security," and "Your Hidden Paycheck." We were not to be concerned with wages. Duke Energy knew what was best for us. Duke wanted us to focus on the retirement package to the exclusion of all else. Duke pleaded with us to focus on the retirement package and work to age 51 or 55 to become eligible for the enhanced early retirement benefit. Year after year these statements of projected early retirement benefits were mailed to us. Duke just wanted us to focus on the early retirement carrot and "trust them." Well, we see where that got us! Duke lured us along with that carrot for twenty to twenty-five years and then Duke ate the carrot. Duke then explained that it was what we wanted! Even though they never asked us for one word of input! Do you smell a rat? Do you smell a liar?

The severity of the reaction to cash balance conversions is also, doubtless, related to the fact that their impact is most directly felt by baby boomers, who are just now starting to approach retirement eligibility and who comprise a vocal and politically important segment of our population.

Here we are again, only we need to be more vocal! Thieves can easily clean out the bank vault if no one ever pulls the alarm.

Explicit early retirement subsidies were added to plans to encourage older employees to leave service; now, employers say they are eliminating those retirement incentives because they want to retain experienced employees, yet those are the employees who - absent substantial transition protections - feel the greatest affront when a traditional plan is converted to a cash balance plan.

Right between the eyes again!

The likelihood that a particular type of retirement plan is responsive to employee needs and priorities as well as those of the employer is strongest when employees, through their collective bargaining representatives or other mechanisms, participate in the design of their benefit plans.

We had zero input into the plan. Very few Duke Energy-employees have union representation. The union representation was so small, that the unions did not stand a chance of fighting Duke's cash balance conversion.

There is substantial evidence that employees acting collectively in an organized fashion, through their labor unions or through other types of networks, can be effective in securing favorable terms for employees affected by a cash balance conversion or in shielding them from a conversion unless it is clear that it will be to the advantage of the majority of them.

But, Duke Energy always tells us that unions are bad for us.

Bringing employees into the decision-making process, by offering an individual choice or through other approaches, can avert potential hard feelings, workplace disruption and impaired productivity in the wake of a cash balance conversion.

That's true but, hiding facts, giving out misleading information, and NOT involving the employees allows greedy corporations to take even more of the employee's retirement money.

A consistent theme of the presentations before the Working Group was the fact that, typically, not enough information is made available to employees affected by cash balance conversions to enable them to understand how the change will affect their personal situations.

Right again! What we do not know will not hurt the Duke Energy senior management.

Enhanced disclosure requirements should emphasize information that employees can understand and that is likely to be useful to them; distribution too much technical information can defeat the purpose as effectively as distributing too little.

Bingo! Duke has exploited that one for years. By constantly repeating useless information, Duke hopes we will forget what the important questions were.

When traditional pension plans, especially those with surplus assets, are converted to account-based plans, plan sponsors are strongly encouraged to include plan design features that, to the greatest extent possible, protect the reasonable expectations of the long-service participants in the prior plan and their likely reliance on those reasonable expectations.

One would think that any company with an ounce of human decency would do that anyway. But, as we have seen, not all companies are blessed with an ounce of human decency. Unscrupulous companies will do ONLY what the law forces them to do.

For employees at or near early retirement age, the value of the 'old-plan' benefit may be so much larger than the accruals under the cash balance formula that they effectively accrue little or nothing for a prolonged period, until the old-plan benefit is worn away.

What Duke did not tell you was that if you were within 7 or 8 years of early retirement on 1/1/97, you may never earn another dime of retirement income. Your retirement accruals effetely ended on 1/1/97!

In some cases the opening balances under the cash balance formula may be set lower than the present value of the old-plan accrued benefit measured on the basis of statutory (§417(e)) assumptions, taking into account the value of the associated early retirement subsidy. This exacerbates the wearaway effect.

Why should Duke just beat us silly, when they can beat us half to death?

There is a widespread suspicion that employers are hiding the reasons for, and impact of, cash balance conversions.

SAY IT AIN'T SO! Our virgin ears cannot take anymore!

Reportedly, some employers have presented the change as an enhancement to the pension program generally, while down playing or omitting mention of the negative effect on some employees.

Sort of like lying between the teeth, wouldn't you say? "I am going to take promised money from you but, trust me, it is good for you.

The elimination of early retirement subsidies is widely perceived as evidence of hostility to older employees.

No hostility involved; Duke just wanted our retirement money, that's all, nothing personal.

There can be little doubt that one reason is that, if the pension plan were terminated rather than restructured, employers would have to pay a minimum 20% excise tax on any surplus pension assets that they recover from the plan after paying off all benefits, even if they transfer the full amount to another retirement plan.

Now we get to the heart of the matter. When companies threaten to terminate the retirement plan if employees do not like them, they are bluffing. Not only do they want our retirement money, but they want it TAX FREE! Companies, such as Duke Energy, can milk the retirement plan for years at favorable tax rates by introducing abusive cash balance conversions. If they were to terminate the plan, they would have to pay up to the employees AND the tax man. Employees would know exactly where they stood! They would not have a "hypothetical" retirement account that is actually worthless. Why do you have a hypothetical account? To make it seem like you are actually accruing retirement benefits, when you are not. When many of us retire at the promised age of 55, our hypothetical accounts will be worth exactly zero!

Defined contribution benefits must be fully funded at all times, whereas cash balance notional accounts can be funded over time, in accordance with ERISA's minimum funding requirements.

That one will cost someone on down the road.

Employers generally aim for higher investment returns on plan assets than they promise to credit on cash balance accounts, particularly since IRS rules currently discourage plans from promising interest credits at rates comparable to likely plan investment yields.

Most funds were already self-funding. Now they will actually be generating profits for the companies. The employees will suffer huge retirement benefit loses while the employers rake in greater profits. What was once a fund for employees is now a profit center for the company.

Some names just keep popping up where ever there is a buck to be pried loose from employees. Remember the guy who worked for the treasury department, who became convinced early on that this new form of pension was a good idea and urged others at Treasury and the IRS to include the "safe harbor" sentence? A month after the sentence was added, he left the treasury department to SELL CASH BALANCE PLANS! His name is Richard Shea. He joined Covington & Burling, a law firm that "helped" companies, such as IBM, with pension plans. He has teamed up with another viper to "make suggestions." Who did he team up with? Remember Ron Gebhardtsbauer? He used to work for William M. Mercer. William M. Mercer was involved in IBM's cash balance conversion. William M. Mercer also handled Duke Energy's cash balance conversion. It was a William M. Mercer attorney who said that he would "sleep better" knowing the dubious sentence was added to the IRS document. How nice that these two have joined up to tell us what is good for us. When the likes of Duke Energy, William M. Mercer, Richard Shea, and Ron Gebhardtsbauer team up to give the employees what is best for them, LOOK OUT!

The first problem, which does not apply to all cash balance plans, is the 'wear away' problem, where older employees go through a period in which they effectively accrue no additional benefits for a period of time. Professor Stein said that some lawyers view this as clearly illegal age discrimination.

If the benefit in a cash-balance plan is considered the annuity at normal retirement age, the effect of most cash-balance plans is to provide successively lower normal retirement benefits for each year of service. This appears to be a violation of the noted statutory provisions.

Professor Stein also was questioned on the issue of whether conversions should be treated as a plan termination, which would require vesting of unvested participants but also income and excise taxes. He said that the excise tax was, in part, designed to discourage plan terminations where older workers were hurt. He suggested that employers viewed conversions as a way of circumventing the termination taxes, and in that sense, conversions could be viewed as a type of tax dodge.

Professor Stein also discussed the real-life policy implications of conversions for mid-career employees. He related his experience with IBM employees, who early in their careers accepted an implicit bargain that they would be paid less while they were younger, but if they stayed with IBM for their careers, they would be rewarded with meaningful retirement benefits accruing during the last third of their time with IBM. He said that the employees performed their side of the bargain, devoting much of their human capital to IBM, but that after IBM's reaped the reward of their employees' long service, they were breaking their side of the implicit bargain. Mr. Tani noted that if the plan had been terminated, the employees would not have received a transition benefit at all. Professor Stein conceded that a termination was worse that a conversion, but the underlying issue was similar, whether older employees are unfairly hurt.

Ditto for Duke-Energy!

David Cook: "The real purpose of the conversion was to eliminate the early retirement supplements."

And finally, the truth comes out!

IRS Chief Counsel Stuart Brown has discussed in his testimony the administrative approach being taken by the Internal Revenue Service and the Department of the Treasury with respect to the issues raised by cash balance plan conversions. We take these issues, particularly those involving age discrimination in conversions, very seriously. We are committed to ensuring that a thorough review, with appropriate coordination with the Department of Labor, is made of all of these issues and that the review of age discrimination issues is coordinated fully with the Equal Employment Opportunity Commission and the Department of Labor.