If employers continue to control the retirement system and manage it for their own benefit, then within our lifetimes, “retirement” will inevitably revert to what it was in the 1930s and before. Society—and taxpayers—will be paying for services to support the millions of elderly, formerly middle-class Americans.
Acknowledgments
IN THE LATE 1990s, I went to Washington to talk to pension experts about why companies were adopting new kinds of pension plans.
My first stop was a leading law firm where the hallways were paved with lush Oriental carpets. There, two $600-an-hour lawyers explained that companies were changing their pensions to make them better for a more mobile workforce and to improve retirement security. They’re still saying this.
My next stop was the Pension Rights Center, with its battered furniture and shabby wall-to-wall. I brought a tray of lattes as a joke, because Fidelity Investments was sponsoring a campaign saying that skipping the daily Starbucks beverage would put someone on the road to retirement riches.
Karen Ferguson, the director of the center since its inception in the 1970s, had rounded up her minuscule staff and a few retiree advocates. They all got the joke but wouldn’t touch the lattes because there weren’t enough to go around. Someone finally rounded up some mugs and the lattes were divvied up. It was a small thing, but it distilled the spirit of the place, which under the guidance of Ferguson has done so much to improve the retirement security of Americans.
Ferguson has always generously shared her knowledge of the legislative horse trading, history, policy, tax rules, and players with every reporter who knocks on her door. Though eternally outgunned by employer groups, insurers, and the investment industry, Ferguson retains unshakable diplomacy and grace and is always a fountain of sources and legislative updates.
Norm Stein, a law professor at Drexel University, provided valuable input over the years. David Certner, an AARP policy expert, has been a valued source on legislation affecting retiree benefits. The attorneys Susan Martin, Bill Payne, and Roger McClow, who have helped thousands of retirees regain the pensions and health benefits they had earned, were amazingly generous with their time.
Many employees and retirees, some now deceased, shared their stories. Ed Beltram, with the National Retiree Legislative Network, spent many hours prospecting for retirees to interview.
I have benefitted greatly from the expertise and guidance of Joelle Delbourgo, my agent, and from the patience and professionalism of Brooke Carey and the staff at Portfolio. Nancy Cardwell provided valuable structural advice, collegues Sara Silver and Vanessa O’Connell read sections of the manuscript and were mensches, and my pet sitter, Diane Woodle, made it possible for me to spend nights and weekends at the office without worrying about the mental health and well-being of my geriatric Jack Russell, Cody.
Many of the stories in this book first appeared in some form in The Wall Street Journal, to which I owe the greatest debt. Every editor I worked with embraced the paper’s high standards for both accuracy and fairness, including its “no surprises” policy, which requires reporters to fully apprise companies and individuals of the content about them in stories before they run.
Dan Hertzberg, the deputy managing editor of The Wall Street Journal for many years, was an early supporter of these stories, which “looked out for the little guy.”
Dan Kelly, The Wall Street Journal’s only part-time Iowa farmer and full-time editor, scrutinized most of my page-one stories, which benefitted immeasurably from his intellectual nimbleness, ability to locate flaws in reasoning, and skills as a devil’s advocate. (“You say here, ‘They ate kittens for dinner.’ What’s wrong with that? Is there a law against it? Did you get their side?”) If the facts and analyses got past Dan, the paper knew it had little to fear.
This book owes a huge debt to Theo Francis, who teamed with me on many of these stories, including our investigation of “dead peasant” insurance and executive compensation. Theo did groundbreaking work in mapping out and measuring the size of CEOs’ deferred compensation, thanks to his unmatched ability to drill into proxy filings to extract well-hidden tidbits. A journalist of catholic interests, he actually found postretirement benefits accounting interesting.
My colleague Tom McGinty joint-ventured on several projects, which could not have been done without his data-mining mastery. I feel dumb just being around him. Thanks also to Elyse Tanouye, my one-time bureau chief, who provided unstinting support and pretends to be interested when I talk about my dog.
Dedicated to the memory of Jersey Gilbert, husband and friend. Je had gelijk in het einde.
Notes
A NOTE ON SOURCES
UNLESS OTHERWISE INDICATED, all financial figures are derived from Securities and Exchange Commission and Internal Revenue Service filings. The pension figures come primarily from the pension footnotes in annual reports (Form 10-K), which include annual data on assets, liabilities, costs, assumptions, and other pertinent figures.
Form 5500, which companies file with the IRS, was the source of some of the liability figures and participant information for qualified (i.e., employee) pension plans.
Executive pensions and deferred-compensation figures and facts come from annual proxy statements (Schedule 14A). Liability figures for deferred compensation at individual companies are extrapolated from deferred tax assets in the 10-Ks and (for banks) from reports filed with the Federal Financial Institutions Examination Council (FFIEC). Liability figures for executive pension liabilities at individual companies come from, or are extrapolated from, pension data in the 10-Ks. Estimates of total executive pay obligations at U.S. companies are derived from Social Security payroll data and were confirmed.
Data for 401(k) plans at individual companies come from Form 11-Ks.
To simplify matters, I have omitted specific citations of pages and dates, but figures for a specific year come from filings made the following calendar year. For example, a figure about GE’s pension obligation in 2009 will be found in the 10-K filed in 2010, just as details about the size of pensions for GE’s top officers in 2010 come from the proxy filed in 2011.
I used Morningstar Document Research (formerly 10-K Wizard) for the securities filings; the IRS 5500s were obtained from the Department of Labor. A free, though somewhat limited, database of 5500s, for both pensions and 401(k) plans, is available at freeerisa.com.
As noted below, other generally nonpublic figures and facts come from court documents.
Unless indicated, comments from individuals are from interviews with the author.
CHAPTER 1: SIPHON
10 “Rigid and irrational legal restrictions”: ERISA Advisory Council, “Report of the Working Group Studying Exploring the Possibility of Using Surplus Pension Assets to Secure Retiree Health Benefits,” November 10, 1999, http://www.dol.gov/ebsa/publications/gulotta.htm.
11 “We believe making excess pension assets”: Ibid.
14 “This restructuring reflects”: PR Newswire, “Verizon Communications Announces Restructuring of Management Retirement Benefits,” news release, December 6, 2005, http://goliath.ecnext.com/coms2/gi_0199-5008432/Verizon-Communications-Announces-Restructuring-of.html.
15 Mark Zellers: “Hardship Testimonies,” gathered by the National Retiree Legislative Network.
16 which are called “420 transfers”: IRS.gov.
16 In the deal, it transferred thirty thousand employees: Ellen E. Schultz, “Raw Deals: Companies Quietly Use Mergers, Spinoffs to Cut Worker Benefits,” The Wall Street Journal, December 27, 2000.
17 GE countersued the U.S. government: Ibid.
18 Don’t put it in writing: “Consulting in Mergers & Acquisitions,” Conference on Consulting Actuaries, annual meeting, Colorado Springs, Colorado, 1996. 19 Royal & Sun Alliance, a global London-based insurer: Gromala v. Royal & Sun Alliance, No. 01-72196 (U.S. Court of Appeals, Sixth Circuit, 2004).
19 got an additional $5,270 a month for life: Ibid.
19 Fruehauf Trailer Corp
. used a trickier maneuver: Fruehauf Trailer Corp., Debtor Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corporation Retirement Plan No. 003, No. 05-1374 (U.S. Court of Appeals, Fourth Circuit, 2006).
20 by cutting the benefits of more than 46,000 long-tenured employees: Engers v. AT&T Management Pension Plan, No. C.A. 98-3660 (District of New Jersey, 2005).
20 provided ASA managers with 200 percent to 400 percent: Ibid.
20 more than twice the amount needed to cover the pensions: Ibid.
22 Florida real estate developer: Footnoted.org, March 2, 2011.
23 Occidental Petroleum terminated its pension in 1983: “Non-Traditional Pension Plan Terminations,” Record of the Society of Actuaries, 1983, Vol. 9, No. 4.
23 Ronald Perelman, who took over Revlon: Ellen E. Schultz, “Pension Terminations: 80s Replay,” The Wall Street Journal, June 15, 1999.
23 Congress slapped a 50 percent excise tax: Omnibus Budget Reconciliation Act of 1990.
25 “the future of the airline is at stake”: Ellen E. Schultz, Theo Francis, and Susan Carey, “Two Airlines Press Workers for Deeper Cost Cuts—US Airways’ Termination of Pilots’ Pensions Could Set Example for Industry,” The Wall Street Journal, March 18, 2003. Quote reported by Susan Carey.
25 Few challenged the “terminate or liquidate” statement: Ellen E. Schultz and Theo Francis, “Most Workers Are in Dark on Health of Their Pensions—US Airways Killed a Plan That Pilots Had No Inkling Was in Financial Danger,” The Wall Street Journal, July 1, 2003.
26 Without the information, the pilots: Author interview with James Kenney, the pilots’ actuary. See also U.S. Airways Group, Inc., United States Bankruptcy Court, Eastern District of Va., Alexandria Div., Case No. 02-83984-SSM, Ch. 11.
26 Denis Waldron, a retired pilot in Waleska, Georgia: “Hardship Testimonies.”
27 The maximum in 2011: $54,000: Pension Benefit Guaranty Corp., Maximum Monthly Guarantee Tables.
27 Don Tibbs, of Gainesville, Georgia: “Hardship Testimonies.”
CHAPTER 2 : HEIST
29 In 1997, Cigna executives held a number of meetings: Amara v. Cigna, Defendants’ Response to Plaintiff’s Proposed Findings of Fact, No. 3:01-CV-2361 (MRK) (District of Connecticut, 2006).
31 In September 1997, consulting firm Mercer signed: Amara v. Cigna.
31 “We’ve been able to avoid bad press”: Exhibits, Amara v. Cigna.
32 The law “doesn’t require you to say”: “Introduction to Cash Balance/Pension Equity plans,” Meeting of the Society of Actuaries, New York, 1998.
33 “Jan, you would be sick if you knew”: Amara v. Cigna.
34 “immediately reduce pension costs about 25 percent to 40 percent”: A Kwasha Lipton partner, benefits conference in 1984.
34 Bank of America was the first company to test-drive: Bank of America’s senior vice president of compensation and benefits, 1993 Conference Board meeting.
34 “One feature which might come in handy”: Robert S. Byrne, partner, Kwasha Lipton, letter to a client, 1989.
35 Amara’s opening balance was $91,124: Amara v. Cigna.
36 Gerald Smit, a longtime AT&T employee: Engers v. AT&T.
36 “masquerading as a defined contribution”: Eric Lofgren, “The Better Alternative Defined Benefit or Defined Contribution Plans,” Record of the Society of Actuaries, 1986, Vol. 12, No. 1.
38 Jim Bruggeman was forty-nine: Ellen E. Schultz and Elizabeth MacDonald, “Retirement Wrinkle: Employers Win Big with a Pension Shift; Employees Often Lose,” The Wall Street Journal, December 4, 1998.
38 Steven Langlie had spent three decades: Ellen E. Schultz, “Problems with Pensions: What You Don’t Know About the Cash-Balance Retirement Plans Can Hurt You,” The Wall Street Journal, November 8, 1999.
39 the giant accounting firm, made a big miscalculation: Schultz and MacDonald, “Retirement Wrinkle.”
41 “The plan took me months to understand”: Donald Sauvigne, IBM’s head of retirement benefits, 1995 actuaries’ conference in Vancouver.
42 Watson Wyatt had been marketing its “pension equity plan”: “Workforce Management: Strategic Retirement Design,” Watson Wyatt Insider newsletter, October 1998.
42 “It is not until they are ready to retire”: Watson Wyatt actuary, “Introduction to Cash Balance/Pension Equity Plans,” Society of Actuaries, New York, October 1998.
42 “but they are really happy”: Meeting of the Society of Actuaries, October, 1998.
42 One service was the firm’s “Aging Diagnostic”: Watson Wyatt Insider newsletter , October 1998.
44 Finlay was exactly the kind of employee: Ellen E. Schultz, “Pension Cuts 101: Companies Find Host of Subtle Ways to Pare Retirement Payouts,” The Wall Street Journal, July 27, 2000.
47 “it masks a lot of the changes”: William Torrie, PricewaterhouseCoopers, “Plan Design Issues: The Corporate Perspective,” New York Annual Meeting, Society of Actuaries, Vol. 24, No. 3, New York, October 1998.
47–48 “If you decide your plan’s too rich”: Norman Clausen, principal, Kwasha Lipton, Society of Actuaries meeting, Colorado Springs, June 1996.
48 Single Payment Optimizer Tool (SPOT): Watson Wyatt client material.
49 “Choosey Employees Choose Lump Sums!”: Watson Wyatt Insider newsletter, 1998.
49 lump sums… shift longevity risk: Author’s analysis. The Social Security Administration has details about life expectancy at http://www.ssa.gov/history/lifeexpect.html; the Wharton School has a life expectancy calculator at http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html.
50 General Motors, for instance, doesn’t allow: Theo Francis, “Pension Tension: Figuring Out When to Lump It,” Wall Street Journal, March 15, 2007.
50 about one-third of blue-collar workers: Bureau of Labor Statistics, 2010.
50 The Marine Engineers’ Beneficial Association: Theo Francis, “Pension Tension.”
51 Mary Fletcher, a marketing services trainer: Author interview.
52 During oral arguments before the Supreme Court: Amara v. Cigna, November 30, 2010.
CHAPTER 3 : PROFIT CENTER
55 Their primary tools included the new accounting rules: Financial Accounting Standards Board, “Employers’ Accounting for Pensions,” Statement of Financial Accounting Standards No. 87, 1985.
57 “You could have real economic wealth transfers”: Julia D’Souza, John Jacob, and Barbara Lougee, “Why Do Firms Convert to Cash Balance Pension Plans? An Empirical Investigation,” American Accounting Association, Annual Meeting, 2003.
58 companies with the most pension income: Ellen E. Schultz, “Joy of Overfunding: Companies Reap a Gain of Fat Pension Plans,” The Wall Street Journal, June 15, 1999.
58 Patricia McConnell, a senior managing director at Bear Stearns: Robert McGough and Ellen E. Schultz, “How Pension Surpluses Lift Profits,” The Wall Street Journal, September 20, 1999.
60 Researchers at Harvard: Daniel Bergstresser, Mihir Desai, and Joshua Rauh, “Earnings Manipulation, Pension Assumptions and Managerial Investment Decisions,” Quarterly Journal of Economics, February 2006.
62 The panelists put on a skit: “Consulting in Mergers & Acquisitions” panel, Conference on Consulting Actuaries, Colorado Springs, 1996.
63 Warren Buffett, chairman of Berkshire Hathaway: Warren E. Buffet, “Who Really Cooks the Books?” editorial, The New York Times, July 24, 2002.
CHAPTER 4 : HEALTH SCARE
65 “Health care costs continue to skyrocket”: John McDonnell, CEO, McDonnell Douglas, letter to retirees, October 7, 1992.
67 A sample from late 1991: “Automakers Face Massive Charges,” Associated Press, November 12, 1991; “Rude Awakening on Health Costs,” The Los Angeles Times, November 13, 1991; Lee Burton and R. J. Brennan, “New Medical-Benefits Accounting Rules Seen Wounding Profits, Hurting Shares,” The Wall Street Journal, April 22, 1992.
67 “The Street views FAS 106 obligations”: Ethan Kra, then the chief retirement ac
tuary at William M. Mercer, “Basics of Funding Retiree Medical,” Proceedings of the Conference of Consulting Actuaries, 1996.
68 McDonnell Douglas’s pump-and-dump maneuver: Company filings; Ellen E. Schultz, “This Won’t Hurt: Companies Transform Retiree-Medical Plans into Source of Profits,” The Wall Street Journal, October 25, 2000.
69 “they created a piggy bank of earnings improvers”: Jack Ciesielski, “Why SFAS Is Not a Dead Issue,” Vol. 3, No. 3, The Analyst’s Accounting Observer, March 23, 1994.
70 R.R. Donnelley, a printing company based in Chicago: Ibid.
71 his largest client, a Big Six accounting firm, fired him: Jeffrey Petertil, “Ignore the Retiree Health Benefits Rule,” The Wall Street Journal, February 21, 1992.
71 Defense contractors and public utilities had an additional incentive: Schultz, “This Won’t Hurt.”
72 Shaklee had to take a minimum-wage midnight-shift job: Author interview.
72 “Just as in war, there are no winners”: Unisys Corp. Retiree Medicare Benefits Erisa Litigation, No. MDL 969, U.S. District Court, E.D., Penn., Aug. 13, 1996.
74 Liz Rossman, Sears’s vice president for benefits: Author interview.
75 Robert Eggleston, an IBM retiree in Lake Dallas: Author interview.
75 Xerox split its active and retired employees into two pools: Company confirmed.
76 Eugene Nathenson, a retired controller: Author interview.
77 William Falk, who oversaw the retiree medical consulting practice: Conference of Consulting Actuaries, October 1998.
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