Ellen Schultz Reveals How Companies Profit From Employee Pensions

En español | It is hard to read Ellen E. Schultz's incendiary new book, Retirement Heist, without getting angry — especially if you've watched your own promised pension or retiree health benefits shrink or disappear.

See also: Excerpt from Retirement Heist

American companies have skimmed profits from employee pensions. — Photo by Xavier Bonghi/Getty Images

We've all heard complaints about spiraling health care costs, aging boomers and stressed corporate bottom lines — the justifications for freezing pensions, reducing health care benefits and moving from defined-benefit to defined-contribution plans like 401(k)s. Guiding us through complex thickets of law, finance and corporate skulduggery, Schultz, a Pulitzer Prize-winning reporter for the Wall Street Journal, illuminates the facts behind the rhetoric.

Retirement Heist reports that, far from crippling companies, many pension funds have helped enrich them. The greatest outlay, Schultz writes, has been for executive pensions and deferred-compensation packages that have spiraled in cost, at the expense of more modest retirement benefits for ordinary workers. More troubling still, she examines how companies have deceived workers about new accounting methods that cut pensions — and how companies skirted the law by secretly purchasing tax-advantaged life insurance policies on even low-level employees.

The AARP Bulletin talked to Schultz about her book.

Q. How did you first get interested in this subject?

A. About 12 years ago, companies were changing their pension plans. They claimed they were doing it to make the plans more modern. Not a single company acknowledged they were making these changes to reduce benefits and to save money.

Q. What surprised you the most?

A. Companies could benefit by cutting benefits even if benefits weren't costing them anything.

Q. How?

A. New accounting rules rewarded companies for cutting benefits, like erasing a debt that hasn't been paid out yet. And when they erased that debt, it generated income for the company. What actually shocked me the most was realizing how much money they could make from the plan when they would sell or buy a company — it's an indirect way of converting pension assets to cash.

Q. In the 1990s, many pension plans were overfunded. What happened to all those surpluses?

A. Companies siphoned billions of dollars from their pension plans. They commonly paid severance benefits from the pension plan, which saved cash. This was a way for executives to shed a large portion of their older workforce. They also used pension assets to pay for retirees' health benefits, which helped lure people into retirement.

Next: Protecting pensions for retirees. >>

Q. What safeguards are in place to protect pensions for retirees and future retirees?

A. If you're already receiving a pension, you're fairly safe — the pension is insured by the Pension Benefit Guaranty Corporation — although there have been some situations recently where that has not been the case. [In the case of some bankrupt airlines] some of the pilots who had already retired discovered that because the plans were so underfunded and they were under age 65, the PBGC reduced the amounts they were already receiving.

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Q. Can you explain the role of the Pension Benefit Guaranty Corporation?

A. It's an employer-funded, mandated insurance program. Definitely there has been a pattern [by companies] to try to shed the pension plan in bankruptcy. The steps to get there include not funding it appropriately. And when it comes time to turn the plan over to the PBGC, companies use assumptions to make the plan look even worse off. And bankruptcy courts have been unwilling to challenge the numbers that companies provide.

Q. Might the very existence of the PBGC act as an enabler for corporate misbehavior?

A. People have observed that, in fact, it has become a moral hazard. By creating a safety net, it has encouraged companies to perhaps not fund their plan properly or to make riskier investments because ultimately they're not going to pay the price. It's the PBGC and the participants who'll pay the price.

Q. What are cash-balance plans, and how have companies used them to reduce pensions?

A. They are essentially pension plans. [But] instead of multiplying the number of years you're there by your average salary, which produces a pension that rises quickly in value in the final years … [the cash-balance plan] basically froze it, and going forward you would only get the equivalent of something like 3 percent of pay per year, a much smaller amount.

Q. And companies didn't explain this to workers?

A. Pension law requires that if there is a significant reduction in a person's benefit going forward, they have to tell you. But many companies did not at all make it clear to people that their benefits were being reduced. Some companies went out of their way to suggest otherwise, such as Cigna. The courts found that managers had really set out to deceive employees and lead them to believe that their pensions were growing — and they were not.

Next: Executive pensions have contributed to the problem. >>

Q. There seem to be even fewer protections for retiree health benefits.

A. Starting in the 1970s and '80s, companies had made very clear promises to people, both salaried and [union]. A series of court cases, in the 1980s and '90s, came to the conclusion that this was not a legally protected benefit.

Q. How have executive pensions and deferred-compensation plans contributed to the overall problem?

A. As executive pay became tied to stock performance, executives who cut pensions and retiree health care were actually doing themselves a favor. As they were cutting regular pensions, they were boosting executive pensions. Often what appeared to be an increase in pension expense was because of the executives, not the regular folks.

Q. What is "dead peasants insurance"?

A. The way that companies have found to create a pension plan [for executives] with tax breaks is by buying large amounts of life insurance on the workforce. A policy is basically a giant tax-sheltered investment pool. It's like an IRA, where you put money into it and it grows tax-deferred. And you would get the death benefit tax-free. Essentially, it was a tax dodge.

Q. How did families find out?

A. Usually by accident. An insurance claims adjuster would mistakenly contact the family instead of the company.

Q. What was the reaction?

A. Horrified. In many cases, the person who died didn't even have health coverage. The family would be left with medical bills, debts, and the company would get millions of dollars.

Q. Has this practice stopped?

A. It has not stopped. The companies stopped buying very broad-based coverage on even the lowest part-time person; they began to limit it to more manager-level people. That doesn’t mean they got rid of already-purchased coverage on their low-level folks.

Q. You tell stories of people who successfully pushed back against companies.

A. One was a Motorola retiree who had a long, successful career as a technical troubleshooter. When he retired and noted that his pension was being miscalculated, by about $100 a month, he tried to get that corrected, and for five years at least they kept putting him off. A court did find that Motorola had miscalculated his pension — and the pensions of several hundred other people. So he not only got his payout — he got it for hundreds of other retirees.

Next: 401(k)s replacing defined-benefit plans. >>