If you're looking for a scary story to read, try "Retirement Heist." In it, Ellen Schultz, a Pulitzer Prize-winning reporter for The Wall Street Journal, describes how executives and accountants legally looted pension plans of billions of dollars. (See "Who killed private pensions?" for more from her book.)
To be sure, the Employee Retirement Income Safety Act of 1974 made clear that pension assets are to be managed solely for the benefit of participants. But Schultz describes how companies still managed to use the money to pay for severance packages and parachute payments to executives, among other things. Some companies simply sold pension assets for cash. Now pensions are collectively 20% underfunded.
Many employees are already aware of how this pension-starving affects them. In the book, Schultz writes about a Delta pilot who'd been receiving a pension of almost $2,000 a month, which fell to just $95 a month after the company went bankrupt. But others have yet to discover what's been going on behind the scenes. If you have a pension and have been planning to rely on it in retirement, listen closely to what she has to say.
Forbes: First, what are some companies that have cut employees' pensions and benefits?
Schultz: The companies I looked at included IBM, Verizon, AT&T, and I could keep going. Cooper Tire. General Motors. It's safe to say that most of the companies in the S&P 500 have done some version of this.
Forbes: And what did they do?
Schultz: Companies began cutting benefits because doing that enabled them to keep the money themselves, and it also boosted their earnings. Cutting harmed employees and retirees, but it boosted the pay and pensions of top executives.
During the '90s when accounting rules changed, this coincided with the trend toward awarding executives' pay that was based on performance. Let's say you reduce pensions by $100 million, that's essentially $100 million that gets added to profit. It's paper profit, but it affects earnings the same way as earnings you get from selling trucks. So executives were rewarded.
Forbes: Don't pension payments for thousands of workers dwarf the amount paid to executives?
Schultz: Not necessarily. Look at Massey Energy(Editors note: now part of Alpha Natural Resources). Last year, they had a huge Big Branch mining disaster. Dozens of miners were killed. The CEO was pushed out. He was given a retirement package that was worth $55 million. And the total payout for the coal miners, for black lung, traumatic workers' compensation (which means severe injury) and pensions and health care, that all came to $37 million, and that's for thousands of people. True, their costs will be ongoing, but it does put the magnitude into perspective.
Forbes: So what do employees do now?
Schultz: In many cases, the damage has been done. If they had a pension, it's already been cut or, in more extreme cases frozen, like at IBM. People who really have to worry are those at a company that's headed toward bankruptcy. That company is probably not contributing to the pension plan and is diverting assets elsewhere. If the plan is very underfunded, then they can lose some of their benefits. People most likely to lose the most are midlevel to upper level managers, I'm not talking about the executive ranks. People close to retirement who have already built up a pretty good pension, they might not get all of it. Your readers would probably be in this particular cohort.
The maximum amount paid out by the PBGC -- the Pension Benefit Guaranty Corp., a federal insurer that takes over failed pensions -- is $54,000 a year in 2011. But the amount can be reduced significantly if the plan is underfunded and because of quirks in the rules. If a person is expecting a pension of $4,000 a month or so, he should keep his eye on the company and make sure the plan's funded.
Forbes: How do people do that?
Schultz: They get an annual disclosure document, though this is often a year out of date.
