September 12, 2011

Staff Picks: Retirement Heist

By: 800-CEO-READ @ 10:21 PM – Filed under: Management & Workplace Culture

Pabst Blue Ribbon has become a trendy beverage across the country. It has developed a blue collar, sub-culture friendly image. But while Pabst has been a huge part of Milwaukee's history, its connections to the city today are limited to its branding, and there are still plenty of working class folks here who won't touch it. That is because, on top of shuttering their Milwaukee factory in 1996, they reneged on their pension obligations to their former workers when they left. In this respect also, it seems Pabst was setting a trend.

Where they still exist, the pensions and health coverage earned by millions of workers in this country are being slashed. Like Wall Street did with people's mortgages, companies have been using a heavy dose of financial engineering to turn worker's retirement benefits into piggy banks—piggy banks they're breaking. It is a story told by Wall Street Journal investigative reporter Ellen E. Schultz in Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers, being released this week by Portfolio.

She begins by telling the story at GE.

In December 2010, General Electric held its Annual Outlook Investor Meeting at Rockefeller Center in New York City. At the meeting, chief executive Jeffrey Immelt stood on the Saturday Night Live stage and gave the gathered analyst's and shareholders a rundown on the global conglomerate's health. But in contrast to the iconic comedy show that is filmed at Rock Center each week, Immelt's tone was solemn. Like many other CEOs at large companies Immelt pointed out that his firm's pension plan was an ongoing problem. The "pension has been a drag for a decade," he said, and it would cause the company to lose thirteen cents per share the next year. Regretfully, to rein in the costs, GE was going to close the pension plan to new employees.

The audience had every reason to believe him. An escalating chorus of bloggers, pundits, talk show hosts, and media stories bemoan the burgeoning pension-and-retirement crisis in America, and GE was just the latest of hundreds of companies, from IBM to Verizon, that have slashed pensions and medical benefits for millions of American retirees. To justify the cuts, companies complain that they're victims of a "perfect storm" of uncontrollable economic forces—an aging workforce, entitles retirees, a stock market debacle, and an outmoded pension system that cripples their chances of competing against pensionless competitors and companies overseas.

What Immelt didn't mention was that, far from being a burden, GE's pension and retirement plan had contributed billions of dollars to the company's bottom line over the past decade and a half, and were responsible for a chunk of the earnings that the executives had taken credit for. Nor were these retirement programs—even with GE's 230,000 retirees—bleeding the company of cash. In fact, GE hadn't contributed a cent to the workers' pension plan since 1987 but still had enough money to cover all the current and future retirees.

[...] So a question remains: With its fully funded pension plan, why was GE closing its pensions?

It is a question the book does a great job of answering, investigating and exposing what has really happened to the pensions of American workers, and how accounting rules actually reward companies for cutting benefits.

With perfectly legal loopholes that enabled companies to tap pension plans like piggy banks, and accounting rules that rewarded employers for cutting benefits, retiree benefits plans soon morphed into profit centers, and populations of retirees essentially became portfolios of assets and debts, which passed from company to company in swirls of mergers, spin-offs, and acquisitions. And with each of these restructuring deals, the subsequent owner aimed to squeeze a profit from the portfolio, always at the expense of the retirees. The flexibility in the accounting rules, which gave employers enormous latitude to raise or lower their obligations by billions of dollars, also turned retiree plans into handy earnings-management tools.

Unfortunately for employees and retirees, these newfound tricks coincided with the trend of tying executive pay to performance. Thus, deliberate or not, the executives who green-lighted massive retiree cuts were indirectly boosting their own pay.

As their pay grew, managers and officers began diverting growing amounts into deferred-compensation plans, which are unfunded and therefore create a liability. Meanwhile, their supplemented executive pensions, which are based on pay, ballooned along with their compensation. Today, it's common for a large company to owe its executives several billion dollars in pensions and deferred benefits.

Retirement Heist is an important book, excellently researched and well-written, and I hope finds a wide audience in both the general reading public and the halls of power.