The Wallaces

US Airlines and Auto Industries: the Pensions Question

(Posted 10/10/2005) - Hundreds of thousands of retirees, from United Airlines to General Motors to Delphi AutoParts have already begun, or are soon going to be, receiving reduced 'promised defined benefits' as these US industries undergo long term restructuring.

The standard argument goes that as embattled industries restructure and downsize, the cost of supporting their retiree defined benefits can not be sustained. What wallstreet and the public seem not to realize is that defined benefits, by SEC mandate and by federal law, require funding of pension plans sufficient to sustain existing retirees should the corporate entity cease to exist! So, what went wrong?

Read my take on this monumental corporate scam for which no top executives or board members are being held accountable!

For those of you that don't already know it, a Defined Benefit Pension Plan is one in which benefits are not supposed to be at the whim of the current corporate executive team. Defined Benefit Plans are legal entities themselves; set up as managed trust funds that are initially funded sufficient for the existing retiree population.

Think about that statement, a trust fund sufficient for the existing retiree population. That means that just like your annuity, the monies were set aside (usually invested) such that a predefined population (of retirees) would be able to each withdraw their defined benefits before expiring. If you remember nothing else from this article, remember the following statement: Once an employee is retired, a company need never put one more dime towards his maintenance, if the pension fund has been effectively 100% funded. That statement puts a lie to all corporate propaganda about costs of retiree pensions being an increasing burden as they downsize their operations.

So, the question is begged, why are there so many underfunded defined benefit trusts out there? If consumers who purchased annuities were being defrauded at the same rate that pensionors were receiving reduced pensions from defined benefit plans, there would be a lot of executive level folks spending time in our federal prison system right now.

For an answer to the question of how under-funding of Defined Benefit Plans is considered an act of god rather than malpractice one has to look back at US pension legislation and common business practices in previous decades. It wasn't until the 1974 Employee Retirement Income Security Act (ERISA) was signed into law that the concept of defined benefit and funding accounting came into general use.

Because it was obvious that there were in existence many underfunded pension plans run by companies at that point, the federally run Pension Benefit Guarantee Corporation (PBGC) was instantiated. Underfunded company plans pay premiums to PBGC with the expectation that on average the premiums will cover the percentage of defined benefit plans that cannot cover their cohort population.

But, that was almost 30 years ago. Its hard to use the 'change-over' in 1975 to justify the underfunded pensions today, right? If you'd believe each of the corporate PR representatives, its just an act of god that has resulted in their company's underfunding of their pension fund trust.

When you look at each of these titans of industry (steel, communications, bio-tech, aviation, and now auto manufacture and parts sourcing), you find a common cause -- during their halcyon years, when each of these companys were growing at double digit rates and their top-level execs where being rewarded with 10's and 100's of millions of dollars -- they rarely contributed to their pension funds.

How is this possible you ask? These companies all actively managed their funds investments, often buying their own corporate shares and booking the market value of the stock as proof that the funds were 'fully funded.' Or they bought stock in their sector, or in derivatives, etc, gag, etc. Now, guess what happens during a market downturn, or a corporate melt-down? Yeah, right, that fully-funded trust suddenly is shown to be a hollow shell of itself.

So, a company like Lucent Technologies got to claim over a billion dollars in bottom line profits on its Defined Benefits Pension Plan in the period 1996-2003, and Never contributed one dime to the trust from its corporate inception (1996) through 2004.

Now we hear Lucent executives moaning about their need to fund the trust because they used its 2001 over-funded value to justify early-retiring 30,000 employees. As the communication industry tanked, their Pensin Fund sector investments in communications stock also tanked. What kind of idiots were they? Why were they heavily invested in tech to the point that it took down the fund more than the 10% of the DJIA? The answer is because until the balloon burst, that is where you invested if you didn't want to fund your Pension Fund with earnings from your business operation. Greedy bastards!

This scenario has played out again and again across all troubled industries. When times are good, corporate execs are loath to place cash from operations into their pension funds. Instead they use 'optimistic' spelled high-risk investments that currently keep the market value high enough that the fund appears (on paper) to be fully funded. When the balloon invariably bursts, these execs are long gone (and well compensated, I might add), and the current crop of managers claim they must take drastic action (read that as reduce benefits) to keep the company viable.

When the company finally throws in the towel and files for bankrupcy protection, the monies left in the trust funds for retirees are drained (having never seen a dime from the corporate body) and PBGC steps in and pays 20-40% of the defined benefit. Hurray for American capitalism!

Bad things can happen to good people. Lots of good people have lost significant pension benefits and more are sure to join their ranks. What I can't accept is that bad things aren't happening to the bad people that consciously plotted this course. At the very least can't we just agree to black-ball these bastards out of any position from which they can exercise such power?