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.
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.
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.
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 actuary 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.
77 Companies could also adopt “more aggressive assumptions”: Enrolled Actuaries meeting, Washington, D.C., March 1998.
78 The flexibility built into the accounting rules: For a detailed examination, see Julia D’Souza et al., “Accounting Flexibility and Income Management: The Case of OPEB Recognition,” Johnson School of Management, Cornell University, 1999.
CHAPTER 5 : PORTFOLIO MANAGEMENT
80 “I guess I’m going to have to die before then”: Author interview with Margaret Jelly.
81 Ackerman had flown corporate jets: Author interview.
83 Justin Freeborn, a legal-aid lawyer: Author interview.
84 found a note from the retired executive, with a personal: Author interview with Audrey Ackerman.
85 Fidelity . . . concluded that 316 retirees had mistakenly been paid: Author interview with BP official.
85 Craven, a widower with macular degeneration: Author interview.
91 Schacht made a presentation to a group: Interviews with Lucent retirees, Henry Schacht.
92 Howard O’Neil, who was ninety at the time: Author interview.
93 Parano . . . sued Lucent in small claims court: Author interview with Joseph Parano, California; Joseph and Susan Parano v. AT & T Corp., Case No. SCS 114017 and 114097, Small Claims Court, San Mateo, 2004.
94 Connie Sharpe, a widow in Las Cruces, New Mexico: Author interview.
96 Walt Ehmer . . . chief executive of Lucent Technologies Denmark: Author interview.
97 Schacht later defended the bonuses: Author interview.
CHAPTER 6 : WEALTH TRANSFER
104 GM has often claimed that its U.S. pension plans: Ellen E. Schultz and Theo Francis, “Hidden Burden: As Workers’ Pensions Wither, Those for Executives Flourish—Companies Run Up Big IOUs,” The Wall Street Journal, June 23, 2006.
104 board of directors of Mercantile Stores met: Transcripts of Mercantile board meetings.
108
total retirement payout was more than $130 million: estimate of total by Theo Francis,
Footnoted.org.
113 executives were receiving more than one-third of all pay: This and other details in this section are based on the author’s calculations and analysis, which were confirmed by Stephen Goss, chief actuary of the Social Security Administration.
114 “The most important contributor to higher profit margins over the past five years”: Steven Greenhouse and David Leonhardt, “Real Wages Fail to Match a Rise in Productivity,” The New York Times, August 28, 2006. Thanks to colleague Tom McGinty for pointing this out.
CHAPTER 7: DEATH BENEFITS
116 Just before Christmas 2008, Irma Johnson: Irma Johnson v. Amegy Bank, No. 4:2009cv01424 (Southern District of Texas, 2009).
117 “dead peasants insurance”: The memos were exhibits in a lawsuit in which the United States Court of Appeals for the Eleventh Circuit held that Winn-Dixie’s COLI policies were a sham transaction for federal income tax purposes. Winn-Dixie Stores, Inc. v. Commissioner of Internal Revenue, No. 00-11828 (U.S. Court of Appeals, Eleventh Circuit, 2001).
121 “Without these suicides, NCC would be running at 33%”: Exhibits provided by Mike Myers, of McClanahan, Myers, and Espey, a Houston law firm that has handled numerous COLI cases.
121 To keep track of when employees and retirees die: Ellen E. Schultz and Theo Francis, “Companies Tap Pension Plans to Fund Executive Benefits—Little-Known Move Uses Tax Break Meant for Rank and File,” The Wall Street Journal, August 4, 2008.
122 His mother died in 1998 at age sixty-two. Her family received a $21,000 benefit: Author interview with John Reynolds.
123 a brown envelope was left on the desk of Ken Kies: Ellen E. Schultz and Theo Francis, “Death Benefit: How Corporations Built Finance Tool Out of Life Insurance,” The Wall Street Journal, December 20, 2002.
124 Ways and Means chairman Bill Archer, who had criticized janitors insurance: Clark/Bardes Inc. proxy statement.
127 The mass death of heavily insured executives: Society of Actuaries meeting, Washington, D.C., 2003.
128 The twenty-year-old was working at a Stop N Go: Schultz and Francis, “Death Benefit.”
130 Banks took out billions of dollars’ worth of this life insurance: Bank “call reports” filed with the Federal Financial Institutions Examination Council.
131 Insurance regulators, who often accommodate the wishes of the industry: Disclosure information based on interviews with regulators and industry representatives.
CHAPTER 8: UNFAIR SHARES
135 The company’s effective guaranteed return on the contribution in the first year: Schultz and Francis, “Companies Tap Pension Plans”; calculation by Theo Francis.
141 Lorenzo Walker, one of the warehouse workers at Hugo Boss: Author interview.
143 One employee got a pension increase: Gromala v. Royal & Sun Alliance.
CHAPTER 9: PROJECT SUNSHINE
148 “The Company is not committed to maintenance of a retiree’s standard of living”: Internal company memos, Ellen E. Schultz, “Retirees Found Varity Untruthful,” The Wall Street Journal, November 6, 2000.
148 “death of all existing retirees”: Company memo.
CHAPTER 10: TWILIGHT ZONE
160 He thought the job was pretty decent: Author interviews with GenCorp retirees, including Ed Peksa, Kenneth Bottolfs, Mabel Kramer, and John Van Dyke; court records in Wotus v. Gencorp, 5:00 cv 2604 (N.D. Ohio).
170 Asarco, was suing him and other retirees in federal court: Asarco v. United Steelworkers of America, 03-CV-1297-PHX-FJM, 2005 U.S. Dist. Lexis 20873 (D. Ariz. 2005); Author interview with Edward C. Yarter et al.
172 Rexam, a maker of cans for beverages: Rexam, Inc. v. United Steelworkers of America, No. 03-2998, 31 E.B.C. 2562 (D. Minn. 2003), later proceedings, 2005 WL 2318957 (D. Minn. 2005).
174 “They shopped more than we did, Judge”: Crown Cork & Seal v. United Steelworkers of America, 03-CV-1381, 32 E.B.C 1950, 2004 U.S. Dist. Lexis 760 (W. D. Pa. 2004), related to Lawhorn v. Crown, No. 1:03-CV-461 (S.D. Ohio 2003).
175 “We will file in federal court against you bastards”: ACF Industries v. Chapman, 4:03CV1765 HEA, reported decision at 2004 U.S. Dist. Lexis 27245 (E.D. Mo. 2004), related to Chapman v. ACF Indus., 3:04-0062, 430 F. Supp. 2d 570 (D. W. Va. 2006).
CHAPTER 11: IN DENIAL
177 but the company denied his claim: Brief of Amici Curiae, National Black Lung Association and Appalachian Citizens’ Law Center, Inc., Lawyer Disciplinary Board v. Douglas A. Smoot, Supreme Court of Appeals of West Virginia, No. 34724.
180 protected by steel fences: Ken Ward Jr., “The Dark Lord of Coal Country,” Rolling Stone, November 30, 2010.
180 And he gets to keep a 1965 blue Chevrolet truck: Compensation details from the company proxy statement.
182 “I took every play like it was my last play”: Author interview.
183 Focusing on the word “a,” the arbitrator said: Victor A. Washington v. Bert Bell/Pete Rozelle NFL Player Retirement Plan, et al., Nos. 05-16366, 05-16533, 05-16845 (U.S. Court of Appeals, Ninth Circuit, 2007).
185 only ninety . . . former pro players covered by the NFL disability plan: Ellen E. Schultz, “A Hobbled Star Battles the NFL: Doctors Say Football Left Victor Washington ‘Totally Disabled.’ Two Decades Later, the League Still Disagrees,” The Wall Street Journal, December 3, 2005.
186 “Injuries may not put you in a wheelchair for the rest of your life”: Author interview with Randy Beisler.
186 Mike Webster had been a center on the offensive line: Sunny Jani, as Administrator of the Estate of Michael L. Webster, deceased, v. Bert Bell/Pete Rozelle NFL Player Retirement Plan, et al., No. 1:04-cv-01606-WDQ U.S. District Court for the District of Maryland, 2005.
188 Douglas Ell, who has handled—and won: Author interview with Douglas Ell.
189 The NFL paid Groom Law Group $2.9 million: IRS Form 5500.
190 Delvin Williams, a former 49ers and Miami Dolphins running back: Author interview with Delvin Williams.
191 As a teenager in France, he had joined the partisans: Author interview with Loewy.
191 Instead of an answer, the next month the administrator sent: Fred Loewy et al. v. Motorola, Inc. Pension Plan et al., No. CV 03-2284 (District of Arizona, 2004).
CHAPTER 12: EPITAPH
198 happy dance: Homage to Gail Collins.
198 companies maintained they could receive the subsidy: Ellen E. Schultz and Theo Francis, “U.S. Drug Subsidy Benefits Employers,” The Wall Street Journal, January 4, 2004.
204 shift the risk to the PBGC: For a detailed look at the most prominent instances of companies passing the buck to the PBGC, see Fran Hawthorn, Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street (New York: Bloomberg, 2008), and articles by Mary Williams Walsh of The New York Times, who has also provided extensive coverage of the fate of pension plans in bankruptcies, particularly at automakers and airlines.
206
Many excellent books have been written: Among them: Teresa Ghilarducci,
When I’m Sixty-four: The Plot Against Pensions and the Plan to Save Them (Princeton: Princeton University Press, 2008); Karen Ferguson and Kate Blackwell,
Pensions in Crisis: Why the System Is Failing America and How You Can Protect Your Future (New York: Arcade Publishing, 1995). This lucid and readable book focuses on pensions, but it has an excellent discussion of the problems with 401(k)s and other defined contribution plans, and it clearly explains “discrimination” rules. Recent reports on 401(k)s include
The Failure of the 401(k), a report by Robert Hiltonsmith, a policy analyst at Demos, November 2010:
http://www.demos.org/pubs/thefailureofthe401(k).pdf. See also
Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits, GAO-11-333, March 2011,
http://www.gao.gov/new.items/d11333.pdf. The Congressional Research Service has done a number of studies on 401(k)s, including
401(k) Plans and Retirement Savings: Issues for Congress, July 2009. Its reports can be found on the CRS Web site:
http://www.pensionrights.org/report-topic-areas/defined-contribution-plans-such-401ks-and-iras.
209 reducing borrowing costs by as much as 40 percent: Analysis by Theo Francis; Ellen E. Schultz and Theo Francis, “Companies’ Hot Tax Break: 401(k)s—Why Firms Stuff Plans with Stock,” The Wall Street Journal, February 11, 2002.
210 fifty million workers lost a total of at least $1 trillion in their 401(k)s: Center on Retirement Research, Boston College.
210 D’Andrea, forty-eight, cashed out her account: Author interview.
210 one-quarter of top executives at major U.S. companies had gains: Analysis by Tom McGinty, based on Compustat data; Ellen E. Schultz and Tom McGinty, “Executives Enjoy ‘Sure Thing’ Retirement Plans, The Wall Street Journal, December 16, 2009.
211 “executives in fixed plans were happier than hogs”: Bob Nienaber, director, benefit RFP, Sacramento, California, telephone conversation with author.
214 In the public plan sector: For a history and analysis of how public plans can become seriously underfunded, see Roger Lowenstein, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis (New York: Penguin Press, 2008). See also Mary Williams Walsh’s extensive coverage of public pensions in The New York Times.