Retirement Heist

by Ellen E. Schultz

  The benefit wasn’t much: $39,000, the equivalent of the salary he had the year he retired in 1979. But he had been counting on it to pay his burial costs and the medical expenses the couple faced, thanks to cuts to their retiree health coverage. “I guess I’m going to have to die before then,” Jelly, who was seventy-nine, told Margaret, his wife of fifty years.

  But even though Jelly had spent his entire career at Western Electric, the letter had come from Lucent Technologies, based in Murray Hill, New Jersey. At that point, Jelly had barely heard of Lucent, a spin-off created seventeen years after he had retired. But like millions of retirees across the country, his pension and retirement benefits were under new management thanks to mergers and restructurings that took place after he retired, thereby shuffling his benefits to a new company. From a management point of view, pools of retirees are essentially portfolios of debts and assets. The debts are the pensions and retiree health benefits the workers earned, and the assets are the funds set aside to pay them. When a business unit is sold, merged, acquired, or spun off, a portfolio of retirees is often packaged along with the rest of the business.

  To the new owners, the retirees in the portfolio aren’t former engineers, managers, or factory workers. They’re a resource to be managed with an eye toward profits. Retirees find it unsettling that their pensions have migrated to new owners, especially when the new portfolio owners send them “Dear Retiree” letters, telling them that their health coverage is ending, their pension has been incorrectly calculated, or other benefits are being cut. When the retirees’ increasingly frantic appeals fall on deaf ears, they conclude that the new company has no loyalty to them. But they don’t realize the half of it. They’ve literally become human resources, to be consumed for cash and profits.

  PENSION ASSETS

  Chuck Ackerman discovered this with a shock in early 2000. The first sign of trouble was when his pension check didn’t arrive on time. At first he thought it was a Y2K glitch. Then he received a letter from Raytheon, a company where he had never worked, telling him that not only was he not going to get his pension check but that he actually owed the company $31,904 that he’d been mistakenly paid over the prior five years. The letter explained that the company would be withholding his pension payments for the next year and a half until the “debt” was paid off. It was like a punch in the gut for the retired pilot, who was already battling cancer.

  Ackerman had flown corporate jets for Hughes Aircraft for twenty-six years, delivering executives, including C. Michael Armstrong, then the chairman of Hughes Electronics, to meetings around the globe, ski vacations, and private homes in places like Baja and Taos. He loved being a pilot, but regulations required that he retire at age sixty, in 1992. He plowed his retirement savings into an eighteen-acre farm outside of Santa Maria, California, where he and his wife, Audrey, cleared land and grew grapes to sell to local wineries.

  Five years after he retired, in 1997, defense giant Raytheon acquired Hughes. The acquisition brought with it a portfolio of thousands of retirees, along with pension and health care liabilities of $5.6 billion, and $6.4 billion in assets to pay the retirees’ benefits. In other words, as part of the acquisition, Raytheon got a pool of assets that was more than large enough to pay every cent of the retirees’ pension and healthcare benefits until they died. Hughes, in effect, sold roughly $1 billion in pension surpluses to Raytheon. This boosted the price Raytheon paid for Hughes, but the acquisition had an immediate payoff: The infusion of billions of dollars of pension assets into Raytheon’s pension plan generated roughly $500 million of income in the first year.

  Despite having acquired $1.2 billion more than needed to pay the retirees’ pensions, Raytheon did what other companies typically do when they acquire a portfolio of assets: It set about trying to maximize its investment. Under pension law, a company can’t cut pensions once retirees start receiving them. But if it determines that the retirees are mistakenly receiving benefits that are too large, it can claw the overpayments back.

  One of the first things companies do is assign their benefits consultants to flyspeck the records and ferret out mistakes in the company’s favor. Given the complexities of pensions, it’s no surprise that they find some. It might be that an incorrect interest rate was used, or that twenty years earlier, a prior owner of the portfolio miscalculated a cost-of-living increase. Raytheon hired Hewitt Associates for this task. On its Web site at the time, Hewitt boasted that one of its audits had “uncovered $4.1 million in savings per year by eliminating participants erroneously left on the carrier’s system.”

  Hewitt concluded that Ackerman’s pension had been incorrectly calculated. Pilots are required to retire by age sixty, so many receive a pension supplement until they reach age sixty-five. The pension administrator had forgotten to end the supplement when Ackerman turned sixty-five. Now Raytheon wanted its money back.

  Pension law requires that pension overpayments be returned to the pension plan, but it doesn’t say who should return the money: the employer that made the mistake, the current portfolio owner, or the retiree. Companies usually pursue repayment from the retirees or their surviving spouses, by reducing the person’s pension or even stopping it altogether until the overpayment is recovered. Private employers like Hughes are allowed to offset 100 percent of a retiree’s pension to recoup an overpayment. Multiemployer pension plans, which cover retirees at different companies, are limited to 25 percent, while the Pension Benefit Guaranty Corp., which takes over failed plans, can reduce a pension by no more than 10 percent, and doesn’t charge interest.

  Ackerman made increasingly frantic calls to the toll-free number of the pension administrator, arguing with the clerk, who didn’t know how pensions work, let alone the kind of pilot’s pension Ackerman had. Ackerman couldn’t prove he hadn’t been overpaid—he was a pilot, not an actuary. He scrambled to find the details in pension stubs going back years, documents he’d received, or forms he’d signed. He couldn’t figure out how the pension was calculated. “When your pension gets shifted from one company to another,” his wife, Audrey, concluded, “they’ve got you over a barrel.”

  Seniors’ advocates say it’s unfair for retirees struggling with small pensions on fixed incomes to pay for a company’s mistakes. “Our clients are often confused and shocked to learn that their pension plan overpaid them,” says Justin Freeborn, a legal-aid lawyer with the Western States Pension Assistance Project in Sacramento, California, funded in part by the U.S. Administration on Aging. He has seen a steady stream of frightened retirees in recent years coming for help when they receive demanding letters from the pension administrators. “In most cases, they had no idea they were receiving the wrong amount. They’ve already spent the overpaid money, and they have no way to pay it back.”

  Chuck Ackerman didn’t have the money or the time to fight in court: Just four days before he got the letter from the pension administrator, he learned that the esophageal cancer he’d been treated for had spread to his liver and lungs. Figuring his days were numbered, he appealed to the company to forgive the debt. While awaiting an answer, he began chemotherapy treatments at a hospital near Santa Barbara, where he ran into a retired vice president of Hughes and told him about his pension problem. A few weeks later, when he checked his mailbox, he found a note from the retired executive, with a personal check for $5,000. He also found a letter from the retirement board of Raytheon, denying his appeal to review their decision to dock his pension.

  Raytheon refused to forgive the debt and demanded that the Ackermans repay it within a year. The couple appealed this decision, because it would have consumed all of their pension plus most of their Social Security, leaving them with nothing to live on. Raytheon relented, and later that year agreed to let them repay $500 a month. Between chemotherapy treatments and battles with the pension administrator, Ackerman poured himself into farmwork. Even as his six-foot-four-inch frame dwindled to 140 pounds, he also made various improvements on the farm—fixing the roof,
mending outbuildings. What bothered him the most, Audrey recalled, was that after he’d spent so many years as a pilot making sure the Hughes executives were safe, “he felt like the company considered him a liar and a cheat.”

  Ackerman died in 2002, and it took his wife two and a half years more to repay the debt to Raytheon, out of her diminished widow’s pension. Then, for three months, even after she’d finished paying the debt, Raytheon mistakenly continued to withhold the $500 monthly repayments. Only after she complained a number of times did Raytheon correct the mistake.

  BLINDSIDED

  A portfolio of retirees can change hands so many times that even the new owner of the retiree portfolio can’t keep track of who’s owed what. In the late 1990s, British Petroleum, or BP, as it is now called, acquired a portfolio of retirees from a variety of companies when it merged with Amoco. In 2000, it hired a new pension administrator, Fidelity Investments Institutional Operations Co., which handles benefits plans covering about nineteen million employees and retirees. The BP plan, thanks to its promiscuous rounds of acquisitions and mergers, had close to fifty thousand U.S. retirees, plus seventy thousand workers and former employees who’ll get pensions someday. Fidelity audited the plan in 2004 and concluded that 316 retirees had mistakenly been paid a total of $100 million that some other predecessor company owed. BP began the process of recouping the money.

  One of the retirees was Charlie Craven, a retired mine supervisor in Tucson. Craven had been receiving a pension of $346 a month for eighteen years, until January 2005, when, instead of a pension check, he received a letter from Fidelity informing him that a recent audit revealed he was receiving benefits in error.

  “You must repay the overpayment of $18,363 in one lump sum by January 21, 2005. If you are unable to make a one time lump sum repayment and wish to set up a repayment plan, your payments are as follows: $1,530 per month for (12) months.” The letter added: “If you do not comply within the stated timeframe, the plan sponsor may take additional steps to correct this overpayment…. Such steps might be to reclassify the [overpayment] as miscellaneous income,” issue a corrected 1099-R, and report him to the Internal Revenue Service, “or take more formal collection action against you.”

  “I thought when you retired, that was it,” Craven said. “How can they come to me all these years later and tell me this?” Craven, a widower with macular degeneration who is nearly blind, had a friend read him the letter, which said that a company called Foundation Coal Corp. should have been paying Craven’s pension, and directed him to write to Foundation Coal, in Linthicum Heights, Maryland, for information about his benefit. In the meantime, he needed to begin repaying the debt to BP. “Please accept our apologies for any inconvenience this may have caused,” the letter concluded.

  Craven had never heard of Foundation Coal. He’d earned the pension working for Cyprus Mines, a copper-and-minerals company, and had bounced among several mines in Arizona and Nevada over the years. He didn’t know which company bought what; he only knew that his check had been coming from BP.

  He was still thinking about this dilemma two weeks later when a second letter from Fidelity Investments arrived, reiterating the demand for repayment. This letter, like the preceding one, was delayed because it had been sent to his prior address in Kingman, Arizona. This second letter noted that Craven had originally earned his pension under the Amoco pension plan, which had merged with the BP plan, “but the liability for that benefit and the associated pension assets were subsequently transferred to Cyprus Minerals in 1985… and therefore not payable under the BP pension plan. This letter didn’t mention Foundation Coal, but directed him to write to Fidelity Investments in Cincinnati or call a toll-free number. Craven asked his friend Ruth Emley, a widow from Nevada he’d met online, to make the call. Ruth, who, like Craven, was seventy-nine at the time, called but got an automated system and was put on eternal hold. “We never got to talk to anyone there,” Ruth said.

  This second letter told Craven that if he disagreed with the demand for payment, he should send a claim, “stating specific grounds upon which your request for review is based,” along with supporting documents, to BP’s claims-and-appeals coordinator in La Cañada Flintridge, California. By the time he got the second letter, Craven had been without his pension for three months.

  So who should have been paying Craven’s pension? Even if Craven had been able to see, his computer was broken, and his research skills were limited. His math wasn’t so great, either: He hadn’t noticed that eighteen years of monthly payments of $346 added up to a lot more than the $18,363 Fidelity’s letter was demanding. Like many retirees, he had not followed the mergers-and-acquisitions activity of his former employer, and kept few records (or, in his case, no records, other than canceled checks). His companion, Ruth, started digging through old boxes of canceled checks and looked in the Yellow Pages under “Senior,” hoping to find someone to help.

  Though Craven was a little hazy on his employment history, this is what records later showed. He first went to work at a company called Cyprus Mines in 1962 and left in 1979, the year Amoco Corp. bought the company. He returned to Cyprus two years later and retired in 1985. The year he retired, Amoco spun off Cyprus as an independent company called Cyprus Minerals, transferring to it the pension liabilities of current employees. Cyprus Minerals began paying Craven a pension for his last five years of work, $52 a month. In 1993, Cyprus Minerals Co. merged with Amax, forming Cyprus Amax Minerals Co. Phelps Dodge Corp. acquired Cyprus Amax Minerals Co. in 1999 and continued paying the small pension. Meanwhile, Craven also had begun receiving a second monthly pension for his earlier work stint, for $348. Amoco paid this, and when Amoco became part of British Petroleum in the late 1990s, the combined company paid this second pension. Got it?

  By the time BP acquired the portfolio of old miners, it had already passed through so many hands that the pedigrees of many of the pensions were in question. Benefits audits rarely turn up any mistakes in the retirees’ favor. As it turned out, though, there was a mistake with Craven’s pension: Following a second review of the paperwork, prompted by a reporter’s call to BP, Fidelity concluded that BP was responsible for Craven’s pension after all. It sent him a letter saying it would resume paying his pension and he would receive his back payments, with interest. Unfortunately, most retirees don’t have reporters interested in figuring out how much pension money they’re owed.

  LUCENT’S SPIN JOB

  Recovering overpayments is just nickel-and-dime stuff when it comes to managing a portfolio of retirees for cash and profits. No one has done a better job at squeezing retirees than Lucent, the AT&T spin-off. Over its short life, Lucent reaped billions of dollars in cash savings and profits from its retiree portfolio, even as the company persistently maintained—to analysts, shareholders, employees, retirees, and lawmakers—that its 130,000 retirees were crushing the company. The argument sounded plausible. Lucent had five retirees for every worker, putting it in the same club as automakers and steel companies. But whatever financial problems Lucent was having, the retirees weren’t the cause. They were merely the scapegoats.

  Lucent was created in 1996 when AT&T spun off its equipment-manufacturing business, including Western Electric and Bell Laboratories, along with their more than fifty thousand retirees. These included telephone operators and linemen, middle managers, engineers who developed missile systems, transistors, lasers, and fax machines, and the factory workers who built them. Some had been retired for months; many had been retired for decades. Some had worked for the business units included in the spin-off, and others had worked in other parts of AT&T.

  Loading up the retirees into a new unit and spinning it off enabled AT&T to unload a $29 billion liability for pensions, health care, dental coverage, and death benefits. But the retirees weren’t a burden to the newly formed company: The retiree portfolio also contained a $29.8 billion pension fund, and two trusts to pay retiree health benefits. All told, Lucent started out with $33.5 bil
lion in assets, to cover a $28.7 billion obligation. In short, the company started out with almost $5 billion more than it needed to pay 100 percent of the retirees’ benefits.

  Lucent, nevertheless, began trimming benefits. It cut the salaried employees’ pensions in 1998, and in 1999 it eliminated discounted longdistance phone rates for anyone who retired after 1983. The move, combined with other changes, lessened the retiree-benefits obligation on Lucent’s books by $359 million.

  Pension cuts and the telecom bubble caused the assets in Lucent’s pension plan to balloon. At its peak, in 2000, it had $45.3 billion in assets—a surplus of almost $20 billion. The vast pool of pension assets boosted Lucent’s income by hundreds of millions each year, from $265 million in 1996 to $975 million in 2000. By 2003 it had added an additional $1.6 billion to income.

  In its early years, Lucent focused on growth: acquiring companies, hiring people, borrowing heavily, and generally operating as if the roaring telecom market would last forever. It didn’t. When the bubble burst in 2000, demand for telecom products and services fell sharply, and Lucent began frantically downsizing. It spun off business units, made early-retirement offers, and cut staff, which the pension plan helped pay for. The company used $800 million in surplus pension assets to pay termination benefits as it cut 54,000 employees from its payroll in 2001 and 2002. It learned this move from parent AT&T, which in 1998 had provided 14,700 managers the equivalent of one half-year’s pay, in the form of a cash payout from the pension plan, as severance. At Lucent, the move consumed $4.7 billion in pension assets. By 2003 Lucent’s workforce had shrunk from 118,000, in 1999, to 22,000.