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How Sempra used cash-balance plans
How companies shortchange older workers
Pension consulting firms will mess you up.
Forget Occupy Wall Street. Forget Occupy Oakland and Occupy San Diego. The next protest movement should be OccupyTowers Watson. Or Occupy Mercer. Or Occupy International Business Machines or San Diego’s Sempra Energy.
Towers Watson and Mercer are pension-consulting firms that help their corporate clients to “tap their pension plans like piggy banks,” according to a hot-selling new book, Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, by Ellen Schultz, a reporter for the Wall Street Journal.
In the book, she highlights sticky-fingered strategies by many companies, such as International Business Machines. She also gives much attention to pension-draining strategies called cash-balance plans that shortchange older workers, according to numerous complaints, lawsuits, and one government study. She wrote about Sempra’s use of the alleged ruse in the Wall Street Journal.
Schultz relates how companies will claim that they are freezing traditional pension plans and slashing or eliminating retiree medical benefits so they can stay competitive, particularly with foreign companies that don’t have such burdens. But that’s hooey, says Schultz. Taking advantage of legal accounting maneuvers, companies are whacking benefits so they can boost their own profits and thus grant even higher remuneration to already-overpaid top executives.
Money cut from pension plans can be added to profits. Decades ago, pension consultants like Towers Watson and Mercer began to realize that “Every dollar a company had promised a retiree — for pensions, prescription drugs, dental coverage, life insurance, or death benefits — was the equivalent of a dollar that could potentially be added to a company’s income.” So the consultants told their client companies (subtly, of course), “Cuts generate gains, which lift earnings, which help the stock price, which boosts the compensation of the executive whose pay is based on performance.”
In short, companies cut pension benefits so chief executives can rake in even more money. So, fleece the employees even more.
The book explains how companies make the pension changes so complex that employees don’t understand that they have been cheated. Even securities analysts may not see that a big portion of a corporation’s earnings comes not from improved operations but from money squirreled out of pension funds. Schultz tells how pension consultants and their clients talk in code but chuckle in private meetings that they have deluded the employees into thinking a pension fund is being “modernized” when, in fact, it is being plundered.
The law requires that pensions be managed for the exclusive benefit of plan participants, but “Pension law is like a toothless dog: it might sound scary, but it has no bite,” writes Schultz. To pluck the funds, companies exploit loopholes and rely on friendly judges and regulators.
She gives numerous examples. Retirees who elect to take a lump sum instead of a monthly payment wind up with a lot less money, she points out.
Another trick is companies telling retirees that in the past they have been overcompensated. They must return money to the company right away. She cites many examples of retired persons who are suddenly told they must give money back. But they don’t have the money. One widow was told that she had waived her right to her survivor’s pension. She couldn’t remember having done any such thing. She wanted proof. But the company told her she would have to subpoena the records. Living on $950 a month of Social Security, she could hardly afford a lawyer.
Companies siphon money from pension funds to finance downsizings and sell assets in merger deals. They purchase billions of dollars of life insurance on employees and collect tax-free benefits when the workers retire or die.
Schultz dissects the so-called cash-balance plans that have caused a ruckus in San Diego and elsewhere. The essence of these plans is complexity. Essentially, a company drops the old formula that calculated benefits by multiplying years of service by average salary. Under this old calculation, an employee who stayed on the job would see benefits rise sharply in later years. But under the new system, the company figures how much a pension would be worth if an employee quit immediately. That becomes “the opening account balance,” which grows slowly.
The bottom line is that older employees, whose salaries are higher and who have already accrued good benefits, get screwed. In 2005, the Government Accountability Office concluded that benefit declines under such plans are greatest for older workers. Professors at two universities concluded that when companies lower pension benefits, particularly through adoption of cash-balance plans, the pay of chief executives tends to leap inordinately.
Sempra Energy switched to a cash-balance plan in 2003. Older employees complained. “It became clear that it would take older workers more than a dozen years under the cash-balance plan to accrue the amount of money we had already accrued under the traditional plan,” recalls Don Wood, then a veteran Sempra employee. “I decided to retire from [Sempra] at age 56. Unless I worked past age 65 under the new cash-balance plan, I would never accrue as much as I had already accrued under the traditional plan.” It was a way for top management “to siphon money out of the employees’ pension system into their own pockets.”
In 2004, Sempra chief executive Stephen Baum raked in $13.5 million in total compensation, four times the industry median. Former San Diegan Graef Crystal, one of the world’s ranking experts on executive compensation, figured that Baum would then be making $154,000 a month in his retirement.
Baum was succeeded as chief executive by Donald Felsinger. He gobbled up $10.2 million last year, which was more than 300 times the median pay of American workers, according to the AFL-CIO. He was replaced as chief executive in June and will officially retire late next year when he turns 65. ■
Here's something you might be interested in.
How Sempra used cash-balance plans
How companies shortchange older workers
How Sempra used cash-balance plans
How companies shortchange older workers
Pension consulting firms will mess you up.
Forget Occupy Wall Street. Forget Occupy Oakland and Occupy San Diego. The next protest movement should be OccupyTowers Watson. Or Occupy Mercer. Or Occupy International Business Machines or San Diego’s Sempra Energy.
Towers Watson and Mercer are pension-consulting firms that help their corporate clients to “tap their pension plans like piggy banks,” according to a hot-selling new book, Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, by Ellen Schultz, a reporter for the Wall Street Journal.
In the book, she highlights sticky-fingered strategies by many companies, such as International Business Machines. She also gives much attention to pension-draining strategies called cash-balance plans that shortchange older workers, according to numerous complaints, lawsuits, and one government study. She wrote about Sempra’s use of the alleged ruse in the Wall Street Journal.
Schultz relates how companies will claim that they are freezing traditional pension plans and slashing or eliminating retiree medical benefits so they can stay competitive, particularly with foreign companies that don’t have such burdens. But that’s hooey, says Schultz. Taking advantage of legal accounting maneuvers, companies are whacking benefits so they can boost their own profits and thus grant even higher remuneration to already-overpaid top executives.
Money cut from pension plans can be added to profits. Decades ago, pension consultants like Towers Watson and Mercer began to realize that “Every dollar a company had promised a retiree — for pensions, prescription drugs, dental coverage, life insurance, or death benefits — was the equivalent of a dollar that could potentially be added to a company’s income.” So the consultants told their client companies (subtly, of course), “Cuts generate gains, which lift earnings, which help the stock price, which boosts the compensation of the executive whose pay is based on performance.”
In short, companies cut pension benefits so chief executives can rake in even more money. So, fleece the employees even more.
The book explains how companies make the pension changes so complex that employees don’t understand that they have been cheated. Even securities analysts may not see that a big portion of a corporation’s earnings comes not from improved operations but from money squirreled out of pension funds. Schultz tells how pension consultants and their clients talk in code but chuckle in private meetings that they have deluded the employees into thinking a pension fund is being “modernized” when, in fact, it is being plundered.
The law requires that pensions be managed for the exclusive benefit of plan participants, but “Pension law is like a toothless dog: it might sound scary, but it has no bite,” writes Schultz. To pluck the funds, companies exploit loopholes and rely on friendly judges and regulators.
She gives numerous examples. Retirees who elect to take a lump sum instead of a monthly payment wind up with a lot less money, she points out.
Another trick is companies telling retirees that in the past they have been overcompensated. They must return money to the company right away. She cites many examples of retired persons who are suddenly told they must give money back. But they don’t have the money. One widow was told that she had waived her right to her survivor’s pension. She couldn’t remember having done any such thing. She wanted proof. But the company told her she would have to subpoena the records. Living on $950 a month of Social Security, she could hardly afford a lawyer.
Companies siphon money from pension funds to finance downsizings and sell assets in merger deals. They purchase billions of dollars of life insurance on employees and collect tax-free benefits when the workers retire or die.
Schultz dissects the so-called cash-balance plans that have caused a ruckus in San Diego and elsewhere. The essence of these plans is complexity. Essentially, a company drops the old formula that calculated benefits by multiplying years of service by average salary. Under this old calculation, an employee who stayed on the job would see benefits rise sharply in later years. But under the new system, the company figures how much a pension would be worth if an employee quit immediately. That becomes “the opening account balance,” which grows slowly.
The bottom line is that older employees, whose salaries are higher and who have already accrued good benefits, get screwed. In 2005, the Government Accountability Office concluded that benefit declines under such plans are greatest for older workers. Professors at two universities concluded that when companies lower pension benefits, particularly through adoption of cash-balance plans, the pay of chief executives tends to leap inordinately.
Sempra Energy switched to a cash-balance plan in 2003. Older employees complained. “It became clear that it would take older workers more than a dozen years under the cash-balance plan to accrue the amount of money we had already accrued under the traditional plan,” recalls Don Wood, then a veteran Sempra employee. “I decided to retire from [Sempra] at age 56. Unless I worked past age 65 under the new cash-balance plan, I would never accrue as much as I had already accrued under the traditional plan.” It was a way for top management “to siphon money out of the employees’ pension system into their own pockets.”
In 2004, Sempra chief executive Stephen Baum raked in $13.5 million in total compensation, four times the industry median. Former San Diegan Graef Crystal, one of the world’s ranking experts on executive compensation, figured that Baum would then be making $154,000 a month in his retirement.
Baum was succeeded as chief executive by Donald Felsinger. He gobbled up $10.2 million last year, which was more than 300 times the median pay of American workers, according to the AFL-CIO. He was replaced as chief executive in June and will officially retire late next year when he turns 65. ■
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