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Pension abuse widespread

By Barbara Whelehan ·
Friday, September 16, 2011
Posted: 3 pm ET

Last week the nation's third-largest public pension fund announced it had established a pension abuse reporting hotline. The California State Teachers' Retirement System's new hotline enables anyone to anonymously report cases of suspected pension abuse, such as incidents of "pension spiking." That's a slick retirement planning maneuver practiced by some public-sector employees to work overtime in the years before retirement so they can get much bigger pension checks.

But what about the pension abuses that occur routinely in the private sector -- abuses that benefit the sponsoring companies but hurt their workers? I'm referring to the abuses exposed in "Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers" by award-winning Wall Street Journal reporter Ellen Schultz.

Retirement crisis

Schultz says the gradual decline of traditional pension plans has little to do with the pig-in-the-python demographic trend of baby boomers all retiring at once. She blames the retirement crisis on top executives, benefits consultants and others in the retirement industry who "played a huge and hidden role in the death spiral of American pensions and benefits."

They have not been held to account for it, she says, and, "if anything, they are viewed as beleaguered captains valiantly trying to keep their overloaded ships from being sunk in a perfect storm. In reality, they're the silent pirates who looted the ships and left them to sink, along with the retirees, as they sailed away safely in their lifeboats."

Her provocative words are backed by scathing accounts of how hundreds of large companies deliberately and deceptively cut back the pension and retiree health care benefits of the rank and file while improving their own bottom lines and the pension benefits of company executives.

Cash balance plans

Case in point: Over the last couple of decades, hundreds of companies have frozen their pensions and converted them to cash balance plans. These are a rip-off to older employees because they end up with a much smaller benefit.

While employers can't take away the benefits that have accrued to workers, they can stop or slow the growth by freezing their plan or adopting a different formula. In other words, they change the rules. With traditional pensions, a worker's benefit grows at a much faster rate in the final working years before retirement because the formula is based on a worker's tenure and the average salary over the last few years of employment. Under cash balance plans, pensions freeze and begin growing at a slower, static rate.

That may not be news, but this was to me: At some companies, when the pensions were converted, the employees' new account balances were actually reduced.  Schultz explains what happens during the conversion process.

"For example, if at the time of the pension change someone had earned the equivalent of a $300,000 payout, the opening account balance might be only $250,000. Consequently, it could take years for the pay credits to build the 'balance' back up to where it had been when the pension change was made. As a result, following the change to a cash balance plan, the pensions of older workers were frozen --- in some cases for the rest of their careers. Employees didn't notice because the amounts on their 'account statements' always appeared to be growing."

How could companies get away with this if pension law protects workers from reduced benefits? Schultz says cash balance plans got around the prohibition against retroactive pension cuts by giving employees who leave the company "at least the value of the benefit they had when the pension was changed." But those who stay on and then retire end up with greatly reduced pension payouts.

Schultz goes into detail about what happened to specific employees at such companies as Cigna, IBM and AT&T, and how the benefits consultants and actuaries behind the scenes designed their marketing campaigns to deflect the truth with broad claims about the new plans' enhanced features. She then explains how pension cutbacks and surpluses as well as retirement health liabilities can be used to manipulate a company's earnings. Even financial analysts couldn't tell that the increase in income had nothing to do with widget revenues.

But that's only the tip of the iceberg. "Retirement Heist" shows how pension benefits for the privileged few have skyrocketed in recent years at the expense of the proletariat. It is a must-read for everyone who has a pension as well as their spouses.

I hope it gets the attention of those in the legislative and judicial branches who have thus far overwhelmingly sympathized with the plight of corporations. Maybe then a pension abuse hotline will be established for the rank and file, and someone will actually be on the other end, answering the phones.


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October 18, 2011 at 11:42 pm

The rationale used to plunder these corporate pensions––"We can't afford to continue these benefits"––sounds like what Republicans are saying in Congress about Social Security and Medicare. Might be good for someone to ask this question. For a lot of people to ask this.

J @ Your Own Retirement
September 21, 2011 at 12:33 pm

The problems really are from the top down. I think years of abuse and lack of innovation is causing the problems of our financial system to bubble to the surface.