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While Executives See Their Pensions Grow,
Regular Workers See Their Benefits Shrink

The Wall Street Journal - by Ellen Schultz - June 20, 2001

Sonny Arnold and Richard Korpan joined Florida Progress Corp. in 1989. Now, 12 years later, both men have lost their jobs since Carolina Power & Light Co.'s acquisition of the utility last year. For one of the men, it's a case of hard luck. For the other, it's a case of hard cash -- lots of it.

Mr. Arnold, a 62-year-old welder-mechanic, hasn't worked the requisite 15 years to begin drawing his pension of $681 a month. He must wait three more years for that. The Tampa house he and his wife live in is paid for. The children are grown and on their own. And Mr. Arnold is receiving $22,968 in severance pay. But he still needs the paycheck.

"I'm going to try to find some work," Mr. Arnold says. That won't be easy, though, because he has asbestosis and lost much of the use of his left hand in an accident on the job. He isn't eligible for retiree medical coverage, and won't be eligible for Medicare until he turns 65. "I don't know what I'm going to do."

Mr. Korpan, 59, needn't look for work. As the former chief executive of the St. Petersburg company, he enjoys the benefits of a pension agreement custom-tailored just for him. Among other things, it credits him with 35 years of service, which will bring his yearly pension to $828,845, or $69,070 a month, according to company filings. He also got $15.8 million in severance.

A spokesman for the newly merged Progress Energy Corp. says the company provided "extremely generous" severance packages to displaced employees, while Mr. Korpan's compensation "was determined by the Florida Progress board and was part of the deal itself."

It's also part of a little-known sideshow to the spectacle of surging executive compensation in recent years. Word of CEOs rewarded with millions of dollars for enhancing profits through layoffs has often provoked public indignation. But the ever-widening gap in retirement income between regular workers and executives has gone largely unnoticed by regulators, policy makers and investors. That's true even though in the past decade, many big companies have been setting up or improving special retirement packages for their highest-paid employees while freezing or trimming pension, medical and other retirement benefits for millions of lower- and middle-income workers.

These maneuvers are perfectly legal. Agreements like Mr. Korpan's that give executives years of service that they didn't actually work, among other generous calculations, have become typical at large companies. The result is that while regular pensions are generally structured to replace 20% to 30% of a worker's final pay, many plans for top executives aim to replace 50% to as much as 100% of pay. When Mr. Arnold finally does begin receiving his pension, for instance, he will get about 18% of his final pay. Mr. Korpan's pension replaces about 50% of his.

"Not only is compensation wealth lavished on top executives while they're working," says Judith Fischer, managing director at Executive Compensation Advisory Services in Alexandria, Va. "After they retire, the supplemental pensions provide a continuation of what I call eternal wealth."

These rich retirement packages have remained largely hidden because disclosure requirements are weak and accounting rules let companies bury the costs within the figures for their regular pensions. And because companies usually don't set aside money for special executive pensions (as they do for rank-and-file pension plans), these programs constitute unfunded liabilities of which many companies' shareholders are unaware.

Regulators don't track the phenomenon, and companies usually provide few clues. Even most compensation experts are unaware of the magnitude of the liabilities. However, a Wall Street Journal analysis of government filings, some obtained under the Freedom of Information Act, shows that special executive pensions account for a growing share of many companies' pension liabilities.

A Wall Street Journal analysis of companies' filings shows that at many the liabilities for the supplemental executive pensions make up a growing portion of total pension liability. Typically, the regular pension plans cover tens of thousands of employees and retirees, while the executive pensions cover fewer than 100.

At May Department Stores Co., where disclosures are more extensive than at most companies, the liability for pensions covering 82,000 employees and retirees stood at $592 million at the end of 2000. But the St. Louis-based operator of chains such as Filene's and Lord & Taylor also had a $147 million liability for special plans that cover fewer than 1,000 executives. In other words, almost 20% of the company's pension liability was for executives, up from 19.2% in 1999.

Marguerite Asbury retired five years ago after 24 years in May Department Stores' audit department, earning a pension of $536 a month. That was enough to replace about 16.5% of her final pay -- hardly generous, even among retailers, which tend to offer small pensions. Executives of the company, meanwhile, have a supplemental pension plan, crafted so that in retirement, they will receive 50% of their final pay from all retirement plans combined.

Mrs. Asbury is relatively lucky. Like many companies, May has taken steps to limit growth in pension costs for regular workers. A change the company made in 1995, just as Mrs. Asbury was retiring, has so far slowed the rate at which employees build up pensions. Under the current arrangement, future pensions will replace only 12% to 15% of the salaries of employees like Mrs. Asbury. May used to increase the pension formula periodically, but hasn't done so since 1995.

A spokeswoman confirms that it hasn't, but says in a statement that "the company updates benefits when appropriate, taking into account many factors, including Social Security benefits and inflation. There has not been an update in recent years primarily due to low inflation." She adds that Mrs. Asbury's retirement benefits are more generous than what executives receive because, adding Social Security and her retirement savings plan, the total amount replaces 57% of her final pay.

Mrs. Asbury doesn't think that's a fair assessment. "Most of the money in the savings plan I saved out of my own pay," she says. "They need to have a halfway decent pension for the small guy," says the 72-year-old Irvine, Calif., retiree.

For years, executives typically relied on the same pension plan as everyone else, so they had an incentive to make it generous. But in the past decade, many executives have been receiving the bulk of their pensions from supplemental executive retirement plans, or SERPs, often called "top hat" plans. The incentive to provide better benefits for regular employees has dwindled. In fact, it is often reversed: Executives' pay increasingly is linked to corporate earnings, which benefit from cuts in the cost of pensions for regular workers and retirees.

Many companies have made such cuts since the mid-1990s. Some have frozen pension benefits or ended cost-of-living rises. Others have converted their regular pension plans to complex new structures with names like pension-equity plans and cash-balance plans. These steps save money by eliminating the sharp buildup of benefits in an employee's last few years. And the plans at many large companies are now overfunded and have no pension expense. In fact, many pension plans shower millions of dollars on the bottom line (thanks to a rule that lets a company count as income the amount by which investment returns on pension assets exceed a pension plan's current costs).

Hershey Foods Corp. switched most workers to a cash-balance plan in the late 1980s, thereby ending the costly system of linking benefits to pay in the final years. But when Hershey's chief executive, Kenneth Wolfe, retires by early next year, his pension will be calculated by the traditional formula that multiplies years of service by final annual average compensation -- $1.3 million in his case. Hershey and Mr. Wolfe decline to comment. The latest Hershey proxy statement notes: "The purpose of the supplemental pension is to provide to executives and upper level management employees the means to continue their attained standard of living in retirement."

Motorola Inc. last year changed its pension plan for 120,000 workers from a traditional structure to a pension-equity plan, cutting Motorola's liability for them by $110 million. Meanwhile, Motorola's liability for executives' pensions grew to 8.7% of its total pension liability from 8.2% a year earlier. The executive pension plan covers just 71 people. A Motorola spokesman confirms the figures but declines to comment further.

Executive pensions often provide annual cost-of-living increases, a feature many companies are removing from regular workers' pension plans. When Huntington Bancshares Inc. Chairman Frank Wobst retires, his estimated annual pension of $995,000 may be adjusted annually to reflect the U.S. Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers. Other employees of the company, including the clerical workers, haven't had a cost-of-living adjustment since the early 1990s. A spokeswoman says that the benefits are in line with peer companies and that the Columbus, Ohio, company could provide an adjustment in the future.

Ironically, the expansion of executive retirement plans and the difficulty of spotting the related liabilities are largely the unintended outcomes of efforts to improve corporate disclosure, rein in growth of executive pay, and ensure that retirement plans don't favor the highly paid.

In the late 1980s, Financial Accounting Standards Board, the accounting industry's rule-making body, implemented Financial Accounting Standard 87 with the goal of forcing companies to reveal their exposure to pension liabilities of any kind -- those for union and salaried workers, as well as for supplemental plans for executives. FAS 87 doesn't require companies to break out the liabilities of different pension plans. At the time, separate executive plans were less common, and many regular plans were underfunded.

Meanwhile, changes to tax law spurred the growth of special executive pensions. Congress in the 1980s set limits on how much annual pay could be taken into account when calculating benefits in regular pension plans. It's currently $170,000. The aim was to ensure that pensions, in order to enjoy tax-favored status, were open to employees at all income levels. The result: Many companies began setting up "excess" or "make-up" plans that let executives accumulate more than they would under regular retirement plans.

Then, in 1994, another tax-law change barred employers from deducting anyone's salary and bonus in excess of $1 million. That further fueled growth in supplemental pensions. It also prompted companies to embrace incentive pay tied to company performance, which preserves the deductibility of the compensation, and plans that, like a giant 401(k), let executives defer huge chunks of their compensation.

These changes meant that by the mid-1990s, big companies had incentives to funnel large amounts of executive compensation toward retirement plans. And they had the means to keep those moves largely hidden, since they didn't have to make a separate disclosure of the new executive plans. To this day, they are required only to file a letter to the Labor Department indicating the number of executive pension plans and the number of participants. Many companies don't even bother to do that.

The increasing use of incentive pay gave top managers impetus to trim the costs of regular pension plans to enhance profits. And that's not all: For pensions that are based on compensation during the last years on the job, anything that boosts an executive's final compensation -- including reductions in benefits for the rank and file -- locks in fatter retirement benefits.

Securities and Exchange Commission filings show that many companies adopted special executive pensions at close to the time that they were curbing pensions for others.

Drug wholesaler McKesson HBOC Inc. set up a supplemental pension plan for executives in 1995 and froze pensions for the rank and file the next year. Despite the freeze, the company had an $8 million pension expense in 2000. It was solely for boosting the pensions of departing executives.

McKesson's frozen plan for regular employees went from underfunded to overfunded. Now, besides no longer requiring company contributions, the plan contributes income to McKesson's bottom line -- income that at many companies helps boost executives' incentive pay. A company spokesman confirms the numbers but points out that when the company froze the pension, it enhanced the 401(k) plan.

Drugstore chain Rite Aid Corp. adopted a supplemental pension for 26 executives in 1996. The following year, it converted one of its plans for regular workers to a cash-balance design, reducing the rate at which people build up benefits. Rite Aid's liability for the regular pension plans -- with more than 18,000 participants -- stood at $65 million on March 3, the end of its latest fiscal year. Its liability for executive pensions, covering just a few dozen people, was $32 million.

Such moves slipped below the radar of the usual corporate watchdogs because the accounting rules let companies lump all their pension liabilities together. That meant that the rising cost of executive pensions could be masked in a company's overall pension obligation, especially as liabilities for regular pensions fell.

A rule adopted in 1998 called FAS 132 was meant to clarify things. It required separate reporting to the SEC of any pension plans that are underfunded or that, like most SERPs, are unfunded. However, FAS 132 doesn't require that those two types be distinguished. SEC reports by Sears Roebuck & Co. and Unisys Corp. mix the liability for underfunded regular pension plans with the liability for special executive plans.

Campbell Soup Co. doesn't report its liability for special executive pensions at all. A Campbell spokesman says this is because the sum is "not material." FAS 132 doesn't specify what is material. Dow Jones & Co., publisher of The Wall Street Journal and The Wall Street Journal Online, doesn't disclose the liability for its supplemental executive retirement plan.

A General Electric Co. report to the SEC labels an entry for $1.13 billion as "pension liability." This large sum isn't further identified. GE confirms it is an unfunded obligation for pensions for GE executives.

The companies all say they are following accepted accounting practices. A GE spokesman, for instance, says, "GE's pension disclosures are in full compliance with SEC requirements and provide a clear picture of the status of GE's pension plans."

International Business Machines Corp. discloses that it has an executive pension plan and reports the plan's liability separately -- but not the liability for a second, less-elite IBM executive pension plan. A spokeswoman confirms this.

In January 1995, IBM moved the bulk of its work force into a "pension-equity" plan, saving the company hundreds of millions of dollars by reducing benefits, even as it set up its special pension plan for executives. A spokeswoman says IBM found that its plan for the regular work force was "overly generous" compared to other companies' plans. She says IBM also sweetened contributions to its 401(k) plan after deciding that that program was less competitive.

IBM's pension plan for regular employees now has a $7 billion surplus, and it contributed $1.17 billion to income last year, equal to 10.1% of IBM's pretax income.

Companies that do disclose the supplemental plans' liabilities often use opaque language that doesn't call them executive pensions. A Hershey SEC filing, for instance, alludes to special executive pensions this way: "As of December 31, 2000, for pension plans with accumulated benefit obligations in excess of plan assets, the related projected benefit obligation and accumulated benefit obligation were $36.5 million and $34.9 million, respectively, with no plan assets." Translation: The company's executive pension liability was $36.5 million last year. Hershey declines to comment.

Not only do executive pensions use the generous traditional formula -- years of service, multiplied by final pay -- but when it's time to figure the pension, they often twiddle with traditional formulas, by, for example, adding extra years of service, as was the case with Mr. Korpan at Florida Progress. Leo Mullin, chief executive of Delta Air Lines Inc., was awarded 22 years of service in 1998, when he had been at the company only 10 months.

Most executive plans come with change-in-control agreements that guarantee benefits. And while regular pensions generally don't vest for five years, some executive pensions vest immediately.

When Gary Wendt was hired as chief executive of Conseco Inc. last year, he was promised a supplemental pension that will pay him $1.5 million a year for life, and that upon death will pay his spouse the same amount until her death. This pension became immediately vested, so it would be paid to Mr. Wendt at age 65 even if he had left the company after a few months on the job. Mr. Wendt also received $45 million as a signing bonus, and departing Chief Executive Stephen Hilbert was paid $72.5 million in severance. Meanwhile, Conseco last year froze one of its pension plans for regular employees.

Many executives have accumulated more retirement benefits than they will ever need. This has led to the latest twist in executive pensions: programs set up by employers that enable executives to trade their retirement benefits for life-insurance trusts that will pass the benefits to heirs free of estate and income tax.

And it's all as well-hidden as the rest: When executives swap their pension benefits, the liability can disappear, so the only reference to the benefit that has been swapped may be a mention of a life-insurance premium being paid on behalf of an executive. GE's proxy noted that it paid $1.3 million in premiums last year for a new life-insurance policy for Chairman and CEO John F. Welch Jr.

Age Discrimination Case Won by Retirees

Companies Transform Retiree-Medical Plans into Source of Profits

The Wall Street Journal - by Ellen Schultz - October 26, 2000

Sears Roebuck & Co. has figured out how to turn its medical-benefits program for retirees into a source of corporate income.

You read that correctly. Last year, the giant retailer's retiree-medical plan added $46 million to the Sears bottom line. And that was on top of the $38 million the benefits program contributed in 1998.

The key to these surprising profits is an arcane accounting rule introduced in the early 1990s. The rule required companies for the first time to report their total anticipated costs for retiree-health coverage. Many companies used the rule to justify cutting that coverage, or shifting its cost to retirees. As a result, a lot of older Americans are struggling to pay their medical bills.

The rule also offered companies a way to arrange their financial statements so that retiree-benefit programs actually became new profit centers.

Employers and benefits consultants have received heat recently for turning pension plans into sources of corporate income. Now, the transformation of retiree-medical programs into opportunities to bolster earnings demonstrates that these companies and their outside advisers possess multiple subtle methods to squeeze profits from their current and former employees.

This latest corporate maneuver was made possible by Financial Accounting Standard 106. Accounting authorities required that large companies adopt the rule by 1993. At a time when medical-cost inflation was running in double digits, the rule was supposed to force companies to acknowledge the potentially huge retiree-medical liability many of them seemed to face.

Some of the charges that companies initially reported on their income statements under the new rule were indeed gargantuan, and they fueled an atmosphere of crisis surrounding corporate health-care costs. Many companies invoked the mammoth liabilities to explain why they had to reduce retiree benefits.

But the crisis turned out to be exaggerated. An analysis of corporate filings with the Securities and Exchange Commission reveal that over the 1990s, companies faced lower medical-cost inflation rates than they had predicted when standard 106 took effect and, as a result, smaller retiree-health liability.

What's more, many companies actually had incentives to err on the side of taking overly large initial charges under the new rule.

One incentive was that excessively pessimistic estimates of future health-care liability provided a rationalization for reducing retiree benefits. That spelled bad news for millions of retirees, such as Elaine Russell, a 77-year-old former Sears worker in Seattle, whose rising medical premiums have forced her to rely on a free food bank.

Retired Unisys Corp. accountant Albert Shaklee, 70, was forced to go back to work at a minimum-wage factory job for a time to keep up with his increased premiums.

Companies had a second incentive to take inordinately huge retiree-benefit charges: If the estimates proved too big -- which is, in fact, what happened in many cases -- companies knew they could adjust their retiree liability downward by recognizing a series of paper gains on their income statements. This pool of potential gains could be drawn upon over a period of years and used to offset retiree-medical expenses.

The kicker is that at numerous companies, including Sears, the paper gains not only erased the retiree-benefit expenses, but exceeded them. And that is how benefit plans came to boost the bottom line.

This sort of income isn't like cash that can be spent. But it can be used to buff a company's financial image by smoothing over dips in operating income. "It can sand the rough edges in a bad quarter," says Jack Ciesielski, an independent accounting expert who publishes The Analyst's Accounting Observer, a newsletter.

Consider the case of Sears.

In response to accounting standard 106, the retailer took a whopping one-time charge of $2.9 billion in 1992 to reflect the present value of its entire obligation to pay for retirees' health care. Wall Street analysts didn't fret much about this accounting estimate because it had no immediate effect on operating cash flow.

The analysts also knew that unlike vested pensions, which under federal law, companies must pay out, health coverage generally may be curtailed, either by killing benefits outright or making beneficiaries pay some or all of the bill.

Sears used the charge as justification to increase substantially the amounts that retirees would have to pay for health coverage.

Shifting the financial burden to retirees has been the only way for Sears, based in Hoffman Estates, Ill., to "remain competitive with the retail industry, as far as costs go," company spokeswoman Peggy Palter says.

Over the course of the 1990s, however, the rate of inflation of medical costs leveled off and decreased, making the initial Sears charge vastly overblown. In addition, the company's shifting of costs to retirees reduced its own obligation.

To illustrate:

In 1992, Sears reported an annual expense of $301 million for retiree-health benefits. The comparable figure for 1996 was just $76 million, a 75% drop.

To reflect its own earlier overestimate of its liability, Sears posted credits in its financial statements in the mid- and late-1990s. The combined effect of these accounting adjustments and the retailer's continued benefit cuts was that by 1997, the Sears retiree-benefit plan was adding $41 million to overall net income. Ms. Palter of Sears confirms this account.

Other companies that have boosted their bottom lines by this method include R.R. Donnelley & Sons Co., Sunbeam Corp., Tektronix Inc., and Walt Disney Co., according to the analysis of corporate filings with the SEC.

Meanwhile, retirees like Ms. Russell of Seattle are paying the price. She stopped working for Sears in 1984, after nearly four decades of full-time clerical duties at the retailer. When she turned 65, the federal Medicare program began reimbursing her for routine doctor and hospital bills. Her Sears retiree coverage provided supplemental reimbursement for prescription drugs.

In 1998, when her prescription costs were about $50 a month, the premium for her supplemental coverage doubled to $58. That might not sound like a lot, but proportionally, it was a huge bite out of her monthly Sears pension of $183.

The premium increase prompted Ms. Russell to drop out of the Sears plan in 1998. That gamble has hurt, because today she needs additional medications for colitis and a thyroid condition. Her monthly prescription bill has leapt to $180.

"I've always saved," says Ms. Russell, a widow who collects $974 a month in Social Security. She drives a 1977 Datsun station wagon and makes her own clothes. Still, it wasn't until Sears doubled the cost of her benefits in 1998, she says with evident embarrassment, that she started taking advantage of a Seattle senior center's free food bank for herself and her two cats. One day recently, she picks out hot dogs donated by a local grocer because they are close to their expiration date. She also chooses overripe bananas, which she says aren't bad if cooked.

Sears maintains that even after shifting costs to retirees, it is "far more generous with benefits than others in our industry," says Elisabeth Rossman, vice president for benefits. "We have taken measures to prudently reduce our costs," she adds. "We were trying to strike a balance between duty to shareholders, so they could get an adequate return on investments, with our duty to retirees."

Next Jan. 1, the company plans to cease paying anything for health coverage for employees over 65 who retire after that date, Ms. Rossman says. However, in 1998, she points out, Sears doubled, to 20%, the discount retirees may receive on clothing purchases.

Companies such as Sears stand to gain when retirees like Ms. Russell drop out of the medical plan, because that ends a company's obligation to pay anything for coverage. Of the roughly 120,000 Sears retirees today, only about 80,000 are receiving medical coverage. Ms. Palter, the company spokeswoman, says costs may be one reason people drop the coverage, but that some retirees do so because they receive benefits under a spouse's plan or they return to work.

Bill Rodino, a 72-year-old retired Sears appliance repairman and supervisor in Brooklyn, N.Y., got a new job to help pay for his Sears coverage. He now works 10 to 15 hours a week as a receptionist at a funeral home. That provides the extra cash to afford last year's 600% jump in his Sears premium, which is now roughly $80 a month. His prescription co-payments have risen to $75 a month.

Even with his part-time job, he and his wife, Jeanne, have gradually drawn down their savings for day-to-day expenses. They weren't aware of the improved Sears clothing discount, says Mrs. Rodino, because they haven't bought new clothes in years.

The seeds of the retiree-health windfall for many companies were planted in the late 1980s, when the Financial Accounting Standards Board, the accounting industry's rule-making body, began to develop standards for reporting retiree-health obligations. Major companies, such as General Electric Co. and International Business Machines Corp., played an active role in the process, suggesting ideas to the accounting board. Companies showed the board computer simulations of how various proposals would affect corporate bottom lines.

Corporations would have preferred not to have to report retiree--medical liability at all. But once that became inevitable, big companies urged the board to give them flexibility in how they projected their retiree-benefit costs, according to people involved in the process. The accounting board went along with many of their suggestions when it issued standard 106.

Jeffrey Petertil, an independent actuary who was an adviser to the accounting-board task force that drafted the new rule, warned in 1992 that standard 106 was so flexible that it would permit companies to overstate or understate their liabilities. But when he expressed this dissenting view in a newspaper opinion piece, his largest client, a major accounting firm, fired him the next day, Mr. Petertil says. He declines to name the firm.

One illustration of the flexibility is the great leeway standard 106 allowed companies to adjust the medical-cost inflation rate used to estimate retiree liability. Having pegged that rate very high early in the decade, companies were able in later years to report income-statement credits that could be used to smooth earnings dips, says Mr. Ciesielski, the independent accounting expert.

Sears, for example, initially used a 14% medical-inflation rate to estimate its liability in 1992, which was in line with national trends. By 1997, Sears had lowered its estimate to 11%. In 1998, it slashed the rate again to 6%.

The proportionally huge rate reduction in 1998, along with less generous benefits, permitted the retailer to report credits that allowed its retiree-health plan to contribute income to the company's bottom line. In 1998, the $38 million credit was the equivalent of a 2% increase in operating income.

The rate changes were made at a time when the company was struggling with credit-card delinquencies and weak apparel sales. Mr. Ciesielski says it's fair to assume that Sears and other companies have used credits from these plans "to smooth earnings during rough times."

Ms. Palter, the Sears spokeswoman, confirms the medical-inflation figures but stresses that the company didn't act to smooth its earnings. Sears changed the inflation assumptions "to be consistent with industry trends," she says. "It was a fiduciary duty to be as accurate as we could. Our experience was already showing that our estimates were too high, and the expenses would be lower."

Donnelley was another company that used standard 106 to justify benefit cuts and improve its earnings numbers. The company said in a letter to retirees in October 1992 that the new accounting rule would have "a serious negative impact on our earnings." The letter noted that because of "skyrocketing" health-care costs, the Chicago-based printing company was forced to begin charging retirees for their once-free medical benefits. Otherwise, Donnelley warned, it would fail to remain "competitive."

Thanks to the new fees, the company slashed its annual retiree-medical expense by more than half in 1995. By the next year, Donnelley's retiree-benefits plan was adding income to the company's bottom line. (Donnelley and some other companies also saw their benefits expenses fall, thanks to investment returns in trust funds set up to finance retiree-health benefits.)

A Donnelley spokesman confirms this account but stresses that the company had reserved the right to change retiree benefits.

Richard Mebane retired from Donnelley in 1993, at 60, when the Chicago plant where he worked closed. He qualified for a $277 monthly pension, on top of his Social Security check of $936. With expensive prescriptions for high blood pressure, cholesterol and a bladder problem, he felt the squeeze when Donnelley in 1996 imposed a $250 annual deductible, which since has doubled to $500, for health coverage that supplements Medicare. He also pays an $18-a-month premium.

"Most of the time, I take the medicine every other day, to keep the cost down," says Mr. Mebane, now 67. Even with the company coverage, he's responsible for a 30% co-payment for prescriptions. By cutting his dosage, he saves about $40 a month, he says. "If I start to feel light headed, I take it every day until I feel better."

Three years ago, Mr. Mebane took a part-time janitor's job at St. Elizabeth's preschool on Chicago's Southside, where he polishes floors and swabs out toilets. He receives no medical benefits from the minimum-wage post.

Another company that wasted little time between adopting standard 106 and slashing retiree-health benefits was McDonnell Douglas Corp. In January 1992, the aeronautical giant reported a $1.5 billion after-tax retirement-benefits charge. In October 1992, it announced that over four years, it would phase out all health-care coverage for its 20,000 nonunion retirees.

In an Oct. 7, 1992, letter to retirees, John McDonnell, then the company's chief executive, said: "The problem we have been wrestling with is not 'just' that health-care costs continue to skyrocket, as everybody knows." In addition, he wrote, standard 106 "threatened to deal a heavy blow to our bottom line."

In fact, by ending retiree benefits, McDonnell Douglas generated $698 million in pretax income reported in 1992. A separate benefits reduction affecting a group of retired unionized engineers generated another gain, this one a more-modest $70 million, reported in 1993. A spokesman for Seattle-based Boeing Corp., which has acquired McDonnell Douglas, confirms the numbers and the letter's authenticity but declines any further comment.

McDonnell Douglas retiree Robert Taylor couldn't believe the news about the benefits cut in 1992. He was especially outraged that the company's pension plan was lavishly overfunded, but McDonnell Douglas wouldn't use that surplus to pay for retiree-medical benefits, as companies are legally allowed to do.

Mr. Taylor, who had joined McDonnell Douglas shortly after World War II and retired as supervisor of technical publications in 1979, died at the age of 79, just before the cut took effect. His wife, Rhada Taylor, now 87, chose to have the new $168 monthly premium for coverage supplementing Medicare deducted from her widow's pension of $420 a month. But the premiums have increased every year. By 1999, her pension money had shrunk by roughly 60%. After another premium increase scheduled to take effect Jan. 1, her monthly pension will be only $79.

McDonnell Douglas's health-care reductions have "wiped me out," says Ms. Taylor, who receives a monthly Social Security check of $1,009. She says she has cut back on wedding and graduation gifts.

As McDonnell Douglas was dispensing bad news to its retirees in October 1992, Unisys was doing the same.

That month, the Blue Bell, Pa., computer company dispatched a letter to 25,000 former employees, saying that "increasing medical costs and growing world-wide competition" were forcing it to "replace" their coverage. The new plan, Unisys said, "will be cost-effective, will provide financial protection against the high cost of illness or injury, and will continue to be available at group rates."

The bad news was that the company, which had paid for past coverage, would now shift the entire cost to retirees over a four-year period.

The missive angered the retired Unisys accountant, Mr. Shaklee, then 61. When deciding in 1989 to retire early, he says he had relied on the company's written promises that he and his wife would have medical coverage for life. Such promises of lifetime coverage were common in the downsizing waves of the late 1980s and 1990s.

Despite his irritation, Mr. Shaklee bought the coverage at first, because his wife Doris, then in her late 50s, had been diagnosed with breast cancer. The Lake Kiowa, Texas, couple couldn't have bought insurance for Doris elsewhere because of her illness, and she hadn't yet hit the Medicare-eligibility age of 65. By 1996, the couple's monthly premium had jumped to $784, exceeding Mr. Shaklee's pension of $727.

So, Mr. Shaklee dropped the Unisys coverage and sought a job that would offer more-affordable insurance. Retiree health-care coverage typically costs more than group plans that include younger, healthier people.

At the Gainesville, Texas, parts-grinding factory where he applied for a midnight-shift job "they kept looking at my resume, asking me whether I knew it was minimum wage," he recalls. He had earned $70,000 a year at Unisys. Hesitant to state the real reason he wanted the job - the $110-a-month health insurance - Mr. Shaklee told his interviewers he wanted to work with his hands.

He held the factory job, and got the insurance, for two years, quitting when his wife got closer to qualifying for Medicare. But today they are scrimping. Prescription drugs cost the Shaklees about $220 a month. To save money, they scratched visits to their grandchildren in California for three years. "If we have a medical catastrophe, we'll be in trouble," says Mr. Shaklee. He is one of a group of Unisys retirees who have sued the company in U.S. district court in Philadelphia, seeking restoration of their benefits.

A Unisys spokesman declines any comment on retiree benefits, citing the pending lawsuit. The company has maintained in the court case that it had reserved its right to terminate the disputed benefits.

Beyond standard 106, another accounting-rule change that became effective in 1992 also has helped employers. Financial Accounting Standard 109 allowed companies to take credit immediately for certain tax deductions expected in the future. The deductions in question are those associated with liabilities such as retiree-medical benefits. Companies could use standard 109 to reduce - or even cancel out - their initial charges for retiree-health liability.

Unisys, for instance, took a charge in 1992 of $195 million for retiree-medical benefits. But under Standard 109, the company was permitted to show a $425 million credit on its 1992 income statement for anticipated tax deductions associated with all manner of liabilities. The result was that in 1992, Unisys reported a net one-time gain of $230 million, courtesy of the changes in accounting standards.

The one industry where at least some employers have faced public criticism for their retiree-health accounting is the utility field. Certain state regulators have been willing to act in this area by using their authority to require consumer refunds.

Warning of escalating retiree-health benefits in 1993, Pacific Gas & Electric Corp. sought additional funds to pay the costs. The California Public Utilities Commission said PG&E could raise rates $181 million that year. Simultaneously, PG&E adopted plan changes that limited the amount it would actually contribute to retiree benefits. The company also used layoffs and attrition to cut its payroll by 17% from 1993 through 1995, further reducing its retiree-benefit burden. PG&E's annual retirement-benefits expense stood at only $12 million last year, down 90% from 1993.

In 1998, the California utilities commission said the company shouldn't have been rewarded for overestimating its retiree-health costs. The commission required the utility to credit a total of $191 million to ratepayers for the years 1993 through 1995. PG&E didn't restore any benefits to retirees.

Chris Johns, a vice president and controller at PG&E, says the compan didn't deliberately overestimate its benefit costs. Instead, the costs fell because of strong investment gains by the company's retiree trust fund, he adds. The refunds were made as a part of the routine regulatory process, he says. For retirees across the country, health coverage soon could get even more scarce and expensive. Companies are running out of the paper gains they can take because of their early-1990s overestimates of retiree-health liability. And health-care inflation is creeping up again.

In marketing material sent to current and potential corporate clients, the benefits-consulting firm Towers Perrin says employers need to think about "new strategies and approaches to managing health benefits." Among those strategies: new benefits cuts.

Retiree Insurance Rip Off

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