A riveting book exposing yet more corporate malfeasance prompted me to recall the Gary Larson cartoon where some clever Indians thought to send flaming arrows into the circle of covered wagons. One pioneer asks another, "Can they DO that?"
Ellen Schultz, a former Wall Street Journal reporter, has written one of the best books yet on the abuses of defined benefit pension funds. In her book, "Retirement Heist -- How Companies Plunder and Profit from the Nest Eggs of American Workers," she outlines the ways in which large public companies shortchange former employees -- while increasing compensation and retirement benefits for senior managers.
Like Larson's pioneers, I was asking myself, "Can they DO that?" I've been in the retirement plan business for 40 years, and I found her account of pension plan abuse to be beyond anything I had ever considered possible. Pension plans can be abused because they have so many moving parts, and they rely on educated guesses of future events. Corporations can deliberately manipulate those future expectations in ways they know will never be true. A culture of selfishness can just rip people off -- legally, as it turns out, if the basic tool (a pension fund) is so abstruse that regulators and legislators can't understand it.
In simple terms, many large corporations use their pension funds as profit centers. When the investments in the plan do well and the plan assets are worth more than the value of the future liabilities they will have to cover, the corporation gets to use that excess amount as part of its profit. Some companies have had their entire annual profit come from pension overfunding amounts.
When they actually take the excess money and use it to pay executive bonuses, the plan will eventually be underfunded during the next market downturn. At that point, they turn to employees and freeze future retirement benefits claiming that the company needs to make that decision to assure its survival.
Retirement health insurance benefits that were promised during an employee's years of service have also been abused using the same "save the company" logic that leads to foregone pension rights. Well into retirement, former employees are now being charged for health insurance premiums that eat up most of their monthly pension benefit. While the employee manual might have specifically said that they would have full company-paid health insurance for the rest of their lives after retirement, the small print said that the company could create its own definition of what that language actually meant.
When companies are acquired, the new company can terminate the acquired company's pension plan and capture the surplus that results. Essentially, this is where they get some of the money to make the purchase. Meanwhile, another type of pension plan lurks in the shadows of corporate America with a growing liability that threatens to dwarf any underfunding of conventional defined benefit plans. These are the so-called "non-qualified" retirement plans for senior executives. Because they discriminate and specifically exclude lower-ranking employees, they do not benefit from any tax shelter, so they are typically unfunded. It's just a promise that the corporation will someday pay a retirement benefit. Well, those promises add up and become a growing unfunded liability.
Yet another questionable artifice is the practice of buying life insurance on every employee in a company -- as many as 22,000 people in one example. The company makes itself the beneficiary and gets to keep the inevitable death benefit -- often years after the person retires. Death benefits are entirely tax free, so this so-called "janitor's insurance" is really just a way for companies to invest money with the payoff of a tax-free windfall.
Management claims that this helps pay for retiree health benefits. Right. According to Schultz, these "dead peasant" policies now represent as much as one third of all life insurance sold in America.
A real cynic would put two and two together and consider the fact that a company that starts charging health insurance premiums to retirees is calculating that some will have to drop their coverage and maybe die a little sooner as a result -- so the company can collect that tax-free windfall a little sooner.
The book reads like a crime novel. About a third of the way in, for example, you read about Lucent, which had 127,000 retirees by 2004. The company decided to cut what they paid for retiree health benefits "to save the company from bankruptcy." At the same time, they increased (you guessed it) the deferred compensation liability to managers to $422 million. The CEO at the time earned $44 million for two years of work.
Truth is stranger than fiction. If "corporations are people," as a presidential candidate recently remarked, then this book's companies would rival the meanest of Elmore Leonard characters. In today's corporate world, "they CAN do that."
Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0505, ext. 228 or email@example.com.