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

GE countersued the U.S. government in the U.S. Court of Federal Claims in Washington,¹ saying not only was it entitled to keep the entire surplus, but the government actually owed GE hundreds of millions of dollars. The company’s reasoning? Because GE transferred so much pension money to Martin Marietta, the pensions of the aerospace workers it didn’t transfer were now less well funded. GE wanted the government to pony up the shortfall. This was just one of roughly twenty lawsuits between GE and the federal government regarding retiree assets that have slogged through the courts in the past two decades.

There’s no way to know how many billions of dollars in pension assets vanished into the coffers of dealmakers in the frenzy of acquisitions, mergers, spin-offs, and the like, because the details are concealed in non-public-disclosure documents.

Generally, lawsuits are the only way these transactions are flushed into the open. Employees have sued when they learned that the surplus in their pension plans was being used to top up the pension of a newly acquired company, or for some other corporate purpose. But the courts have essentially green-lighted these indirect pension raids.²

Companies keep these arrangements out of the limelight because employers are fiduciaries, meaning they’re supposed to manage the plans solely for the benefit of participants and beneficiaries. Actuaries and lawyers discussed this dilemma at a session on “Consulting in Mergers & Acquisitions” at a professional conference in 1996. Their solution? Don’t put it in writing. “The parties need to cut a purchase price and that’s it,” said a partner with the New York corporate law firm Sullivan & Cromwell. “That way nobody can pinpoint what portion of the purchase price, if any, was attributable to the pension surplus.”

A principal at Mercer, the human resources and benefits consulting firm, explained that some of the companies he worked with “believe that none of this should be documented, so they don’t leave a nice paper trail. You need to decide what situation you find yourself in.” The panelists noted that buyers typically pay fifty to eighty cents on the dollar for surplus assets.

PENSION PARACHUTES

Conveniently, when key managers lose their jobs in connection with mergers, spin-offs, and other restructurings, the pension plan can help finance their departure payments. These arrangements also remain off the radar screen of regulators, employees, and the IRS. In 1999, Royal & Sun Alliance, a global London-based insurer, closed a Midwest division and laid off all 228 of its employees. Just before the shutdown, the insurer, commonly known as RSA, amended the division’s employee pension plan to award larger benefits to eight departing officers and directors. One human resources executive, for example, got an additional $5,270 a month for life, paid out in a lump sum of $792,963.

Fruehauf Trailer Corp. used a trickier maneuver to deliver departure bonuses to its human resources executives. The truck manufacturer was going over a cliff in 1996, and about three weeks before it filed for bankruptcy protection, the company transferred $2.4 million in surplus assets from the union side of Fruehauf’s pension plan into the frozen plan for salaried employees. It then awarded large pension increases to a select few. The most substantial increases went to members of the Pension Administration Committee, including a 200 percent increase to the vice president of human resources and a 470 percent increase to the controller.³

AT&T used pension assets in a variety of ways. In 1997, AT&T offered 15,300 older managers the equivalent of a half-year’s pay, in the form of a cash payout from the pension plan as severance if they voluntarily agreed to retire. The move consumed $2 billion in pension assets.

Michael J. Gulotta, who led the ERISA Advisory Council task force as it explored ways to use pension assets, was also the president of Actuarial Sciences Associates, AT&T’s benefits consulting subsidiary. In 1998, he helped the company change its traditional pension to a “cash balance” pension (more on these later), which saved the company $2.2 billion by cutting the benefits of more than 46,000 long-tenured employees in their forties and fifties. Many would see their pensions frozen for the rest of their careers.

Employers can use pension assets to pay the actuaries, lawyers, financial managers, and trustees who provide services related to the management of the pension plans, and uncounted millions have gone to pay the actuaries who craft ways to cut benefits and to lawyers who defend suits brought by pension plan participants. For its consulting and administrative services in connection with the cash balance conversion, AT&T paid ASA $8 million from the trust assets of the AT&T Management Pension Plan.