Retirement Heist: how companies plunder and profit from the nest eggs of American workers

Galloway had never worked for TRW but, like millions of other retirees, including the Western Electric and AT&T employees who ended up with Lucent and the McDonnell Douglas retirees who ended up at Boeing, he was part of a portfolio of retirees that had passed through several owners’ hands. Not surprisingly, none of the owners felt like paying the retirees’ benefits, but they couldn’t cut the pension plans, which are protected by law. Yet the law protecting retiree health benefits wasn’t as ironclad as they thought. So this was where employers directed their legal firepower.

The quest to end Galloway’s retiree health coverage actually began at another company, Massey Ferguson, which bought the company he worked for, Kelsey-Hayes. Massey Ferguson isn’t a household name outside the Farm Belt, but for most of a century it was an almost iconic fixture in the Midwest. Founded in 1847 by a storied Canadian family whose descendants include the actor Raymond Massey, the company thrived until the agricultural recession in the 1970s dried up demand for its combines and tractors. The struggling company subsequently passed through many hands, all eager to extract a profit, at whatever cost. Conrad Black, the controversial Canadian businessman, gained control of the company in the late 1970s and added it to the portfolio of mining, media, and other businesses owned by holding company Argus Corp. The company didn’t thrive, and Black resigned as chairman of Massey Ferguson in 1979 and moved on to become a media baron and a prison inmate after being convicted of mail fraud and obstruction of justice.¹⁶

Black may have been gone, but he was replaced by a new chief executive cut from the same cloth: Victor A. Rice, a pugnacious Brit who claimed to be the son of a chimney sweep. In 1986, Rice changed the name of the company from Massey Ferguson to Varity (after his initials), bought a couple of companies, including Kelsey-Hayes, the one Galloway worked for, and began looking for ways to boost profits. The retirees were an obvious resource.

Soon after ascending the throne, Rice demanded a status report on retiree costs. The managers at the company’s Buffalo, New York, headquarters gave their boss what they assumed was good news. The pension was overfunded, and retiree health costs were “low.” But Rice wanted to cut retiree benefits anyway, even for the most elderly. A memo summarizing his “Philosophy & Objectives” made this clear. “The Company is not committed to maintenance of a retiree’s standard of living.”

Varity’s managers sprang into action, but nothing they suggested was dramatic enough to satisfy Rice. He told them to be a little more creative, and he didn’t let up. Under increased pressure to deliver a plan that would generate big savings, human resources manager Jill Wellman produced this snappish memo: “You have asked that I be inventive in coming up with a solution,” she wrote to her superiors a week before Christmas in 1986. “As far as I can determine there is only one solution” to save the company the most money, she concluded. “That would be the death of all existing retirees.” This happy outcome was, alas, many years in the future.

So Wellman’s memo went on to detail “more practical” but “not necessarily legal” solutions to help her employer meet its cost-cutting goals. One option: Establish “an offshore company responsible for the retirees but not accountable under United States law and have it go bankrupt and thus terminate the plans.” Another: Simply terminate the benefits, wait for the retirees to sue, and then drag out the litigation until the retirees gave up or died.

But Paul Pittman, a benefits and compensation manager, was worried that Wellman’s suggestion about provoking a lawsuit was risky. The company had promised the benefits to both salaried and union retirees. Varity’s lawyers prepared a “litigation risk” report, which noted that the company had promised the benefits. “Worse yet,” the report had said, “there is language in many of the contracts, booklets, and general descriptive material that implies a lifetime commitment. We would never succeed in court.”

Indeed, Wellman herself had drafted a form letter she called a “death letter,” which for years she sent out to widows of retirees, promising health coverage for life. A letter to one Flossie Pietila reassured her: “Mrs. Pietila, our health and dental benefits will continue for the rest of your life at no cost to you.”

Pittman suggested lying to the retirees. In his memo, he called this the “pleading” strategy. The company should tell retirees “that the burden of medical expenses amongst US retirees is unbearably high and would ultimately cause Varity Corporation to cease trading in the US,” Pittman suggested, “and that this would necessitate not only a loss of medical benefits, but also possibly the loss of some pension rights as well.” Although this wasn’t true, if the retirees believed it, they might agree to benefit reductions.