Bush signs bill giving pension aid to US companies

CRAWFORD, Texas (Reuters) - President Bush signed into law Saturday a measure aimed at saving U.S. companies more than $80 billion in pension contributions over two years, days before many firms make quarterly payments.

Businesses lobbied hard for the bill, which would provide about $80 billion in pension accounting relief through the end of 2005 for some 31,000 companies with traditional "defined benefit" pension plans. Those cover about 35 million workers and promise a specific payout based on salary and service.

Many traditional pension plans are underfunded because of the weak stock market the last few years and current low interest rates, and companies are struggling to keep up with the payments as profits have shrunk in part because of the struggling economy.

The relief comes from replacing a formula for calculating pension contributions. None of the aid comes from government payments.

The law goes into effect in time for the next round of payments, set for Thursday, and is intended as a temporary measure to help keep plans afloat while Congress works on longer-term pension reform.

There would also be $1.6 billion in extra relief through waivers of payments for a handful of steel companies and major U.S. commercial airlines particularly hard hit in recent years, such as bankrupt United Airlines, a unit of UAL Corp. These companies would receive waivers for payments.

Some Democrats were angered by the legislation because it contained little help for plans sponsored by more than one employer, which cover mostly union workers like in the construction and trucking industries.

Massachusetts Democratic Sen. Edward Kennedy said less than 4 percent of the 1,600 multi-employer plans, which cover more than 9 million workers, now qualify for help.

Published on 9/8/2003 in the Business Week

The Great American Pension-Fund Robbery

by Robert Kuttner

America's corporate pension system is said to be facing a perfect storm: Equities have taken a big hit (they are still way off their highs), and returns on bonds have plummeted, leaving pension funds with reduced earnings to pay benefits. In addition, corporate downsizing and lengthening life spans have left many companies, particularly in manufacturing, with a rising ratio of retirees to active workers. U.S. Treasury Under Secretary Peter R. Fisher has testified that pensions are underfunded by $300 billion -- far exceeding the resources of the government's Pension Benefit Guarantee Corp.

But if pensions are under water, the cause is less a perfect storm than a leaky boat ravaged by pirates. For more than a decade, corporate sponsors of pension plans have been systematically looting them. The great pension raid is of a piece with the other accounting deceptions of the 1990s, and it had the same motivation -- to boost reported earnings and stock prices.

Since the 1980s, many corporations have shifted from traditional defined-benefit plans to defined-contribution plans such as 401(k)s, which cap the company's liability and shift the risk to workers and retirees. But that shift is only the most visible part of the story. As of yearend 2002, some 42 million workers and retirees and $1.6 trillion dollars were still in traditional pension plans -- and these have been raided.

Among the favorite gimmicks for creative theft of pension assets:

-- Project an unrealistically high rate of return and claim that the plan is overfunded. Then reduce contributions to the plan and divert the plan's assets to fattening the bottom line. This maneuver allowed corporations to hype reported earnings by 10% to 15% during the 1990s, which in turn contributed to the same stock market bubble that supposedly justified the inflated rate of return. When the bubble burst, pension plans found themselves underfunded.

-- Convert from conventional plans to "cash-balance plans." This was invented by Bank of America in 1985 and widely imitated. Terminating a pension plan results in a large tax penalty, so consultants invented a hybrid that quacks like a 401(k) but doesn't trigger the penalty. The Internal Revenue Service went along with the fiction that a cash-balance plan, which reduces payouts, is not really a termination of the plan. The conversion creates imaginary individual accounts that pay a set rate of return. Companies then book their projected future savings as current earnings, thanks to a bizarre determination by the Financial Accounting Standards Board. On July 31, in response to a lawsuit by IBM workers, a federal judge ruled that such conversions constitute illegal age discrimination.

-- Redefine employees as independent contractors. In 2001, Allstate Corp., which had long distinguished itself by having an employee sales force with good benefits, converted some 6,400 longtime employees to independent contractors, shortchanging their pensions.

-- Sell off units that have older employees, who then lose their pension benefits. This sweetens the value of the deal. In 1998, Halliburton Co. acquired Dresser Industries Inc., then spun off its Dresser-Rand unit in 1999. Workers found themselves with pension benefits reduced by an estimated $25 million. (Dick Cheney got a generous severance and retirement package when he left, however).

-- Declare bankruptcy, but set up a special bankruptcy-proof pension plan for top executives as an off-the-books trust. Unlike a "qualified" pension plan, which produces tax breaks for the company, these special executive plans are funded in aftertax dollars that would otherwise go to shareholders. Enron Corp. did this. Last April, American Airlines Inc. tried it -- but relented and had to sacrifice Donald J. Carty, CEO of American parent AMR, after its unions went ballistic. In a bankruptcy, of course, employees can lose some or all benefits.

Once, pension plans were intended to induce loyalty and long service in workers. Now, big corporations and their executives seem to care about only one category of worker -- top managers, who loot the plans while protecting their own assets. Ordinary long-tenured employees are deemed liabilities.

The remedy for depleted pension funds is much tougher regulation. But the Bush Administration wants to weaken anti-discrimination rules to make it even easier for top executives to have one set of rules for employees and another for themselves. To solve the underfunding problem, the government should be forcing companies to disgorge money that was improperly diverted from plans to corporate bottom lines, thus making the plans whole. Instead, the Administration wants to allow companies to use more liberal accounting assumptions about rates of return.

It's fine to have an Administration that prides itself on being pro-business. But don't the tens of millions of employees who loyally serve Corporate America also count as part of business? Shouldn't their pensions be protected as well?

Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale

http://www.cfo.com/article/1,5309,7224,00.html?f=related

Defined Benefits, Loose Accounting

For years, corporate earnings -- and hence corporate share prices -- have been bolstered by gains from corporate pension plans. That's likely to end.

David M. Katz, CFO.com

May 20, 2002

Doing a story on defined-benefit pension plans is a lot like going to a museum of natural history. The word "relic" seems to come up an awful lot.

With good reason, too. For the most part, defined-benefit plans are relics -- dusty vestiges of a bygone era when unions were able to negotiate plum retirement plans from employers. Under a defined-benefit setup, a plan sponsor guarantees a specific payout to plan participants. By contrast, defined-contribution schemes -- 401(k) plans, for instance -- only require employers to guarantee the kick-in, not the payout.

Generally, plan sponsors have found it much easier to guarantee contributions than investment gains. Indeed, over the past two decades, defined-benefit plans have been supplanted by less-onerous defined- contribution plans as the retirement scheme of choice among most employers.

Despite this steady decline in popularity, a fair amount of old-guard companies still operate defined-benefit plans. And many of those companies have benefited mightily from their antiquated defined-benefit plans.

How? Thanks to the magic of pension accounting, defined-benefit plan sponsors are able to treat gains on plan investments as earnings. Given the bull market of the late nineties, that added income has substantially boosted income for many publicly traded corporations.

But expect most of those paper gains to vanish -- and soon. For one thing, the bear economy has made the bullish forecasts of the investment returns of many plans look downright Pollyanna.

Moreover, analysts and auditors are beginning to take a dim view of companies that repeatedly use their pension plans to inflate earnings. As CFO.com reported last week, Standard & Poor's excluded pension-generated earnings from its much trumpeted "core earnings" metric. S&P's new earnings gauge is designed to show the true financial performance of a business -- and not bookkeeping gains.

Adding injury to insult: S&P's new earnings metric treats pension payouts as a cost. That's a big shift from GAAP accounting.

In the coming months, S&P plans to plug its core earnings calculation into its massive database. The rating agency's newfangled treatment of pension plans will no doubt help lower the earnings of many companies listed on its indices.

Can't Touch This

But despite the pain, at least one retirement-plan consultant says finance chiefs would do well to follow Standard & Poor's lead in placing less stress on pension-related income numbers.

"CFOs should be managing their companies to do what their company does and [use the] pension to attract and retain employees," says John Ehrhardt, a principle and consulting actuary with Milliman USA. "They should look at what their operating earnings look like without the pension plans -- and be managing to that number."

Gains in pension assets, of course, have never really ended up in corporate coffers. "It's really a negative expense that looks like profits," he says.

Under GAAP accounting, corporations can take credit on their financial statements for an anticipated gain on pension investments once benefits payments and administrative costs are accounted for. Under GAAP, that excess can be counted toward net income. On the balance sheet, a positive return can appear as an asset or a diminished liability.

But while a defined-benefit plan surplus is a corporate asset, it's an asst that's damned near impossible to liquidate. Indeed, surplus pension assets are held in trust funds that corporations can tap only to pay benefits.

The only way a plan sponsor can gain pocket excess pension income is by unraveling the plan -- and distributing the benefits via annuities or similar vehicles. That, of course, would mean paying substantial taxes on the money that remains after the benefits are distributed. Says Ehrhardt: "They can't access that surplus in any tax-efficient method."

Smooth Operators

Rather than unraveling over-funded plans, companies have used pension investment gains to make up for plummeting corporate revenues. Indeed, thanks to widespread use of asset-smoothing techniques, many plan sponsors have been able to bask in the glow of the nineties bull market long after that boom went bust. (Under FAS 87, companies can spread pension gains and losses over a five-year period, or a shorter timetable.)

Thus, even though the total surplus assets of the pension plans of 50 of the biggest U.S. corporations dropped by $100 billion in 2001, the income of those plans actually rose $4 billion (from $92 billion to $96 billion), according to a survey of the plans by Milliman USA. The firm reckons that at least 22 of those companies use asset-smoothing techniques.

The problem for many of these companies: Their giddy growth projections for their pension investments now look hopelessly out of reach. Even in 2000, when the stock market justified optimism, corporations were overly buoyant in their projections. On average, employers predicted that their pension plans investments would yield a 9.38 percent return, or more than $51 billion. As it turned out, the actual return was slightly less impressive--around $14 billion.

What's more, it seems experience was a poor teacher. Despite missing their 2000 investment targets by a country mile, corporate forecasters forged ahead and bumped up their predicted pension plan returns for 2001. For that year, plan sponsors forecast their pension plan investments would generate a 9.39 percent return.

They were wrong. Rather than clocking a 9.39 percent investment return, plan sponsors got clocked, losing $36 million on their investments. For the two years, plan sponsors were off by $90 billion in their investment forecasts.

As a result, the pension plans of 28 of the companies surveyed in the Milliman USA study recorded deficits in 2001, with nine showing deficits of more than $1 billion. General Motors, for instance, saw its $7 billion 1999 pension surplus turn into a $9 billion deficit by 2001 -- the biggest deficit by far among the companies surveyed.

To be sure, some corporations pension plans were so overfunded that the investment losses, while huge, didn't cut that close to the bone. While Verizon saw more than half its pension-plan surplus vanish in 2001, that still left the company with a $12 billion surfeit.

"This isn't a story about benefits not being there," concedes Ehrhardt, noting that the plans of the companies surveyed still cumulatively sport an $18 billion surplus. But next year, he cautions, some companies will have to inject cash into their plans.

Scylla and Charybdis

This year, CFOs will no doubt feel pressure to slash aggressive pension forecasts.

Such a move will involve considerable pain, however. Lowering the return assumptions could leave a big hole in corporate income statements. In 2001, for instance, cutting the expected rate of return on pension plan investments by one percentage point would have depleted corporate earnings by $5.7 billion, according to the Milliman study.

Nevertheless, if plan sponsors again come in with sky-high forecasts, that may lead auditors and investors to "question all the numbers" on a company's financial statements, says Ehrhardt.

That's not a happy scenario for any finance chief -- particular a CFO who pushes the bookkeeping envelope. As Ehrhardt notes, some finance chiefs will want to avoid any suggestion "that their companies are milking the pension plan to sweeten the bottom line."

Even if they are.

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