Retirement Heist: how companies plunder and profit from the nest eggs of American workers

The “prosecutor,” played by the chief actuary at the American Academy of Actuaries, asks the actuary to defend his decision to use a 1951 mortality table to calculate the liability.

PROSECUTOR: Didn’t you choose these assumptions . . . so you could transfer as much money as possible to the buyer?

BAD ACTUARY: No, these are miners, so their life expectancy is not nearly as great as that of the general population.

PROSECUTOR: How much did you get for them in the purchase price? Is it 80 percent or 90 percent?

BAD ACTUARY: Well, it turned out that way in this transaction.

But he defends his actions saying he was just doing what his client wanted.

The skit concludes with the “prosecutor” telling the “bad actuary” that he’s done a good job. “Someday the PBGC is going to . . . make an example of somebody. So when you get involved in these areas, make sure you’re ready to answer all those questions. Have your answers ready.”

None of this was illegal, but it shows how routine these sales transactions were.

ACCRUAL WORLD

The pension income charade began to change after the market tanked in 2001. When the market was rising in the nineties, few analysts noticed that falling pension obligations and 30 percent investment returns were fluffing up profits, and companies didn’t go out of their way to call attention to it, preferring instead to let investors give company executives all the credit.

But when pension plans began losing money from 2000 through 2002, in part because managers had loaded them up with stock to boost pension income, companies quickly blamed the pension plans for their financial woes. Securities analysts who had been oblivious when pensions were pumping up income began cranking out reports dissecting the many ways pension plans were hurting earnings. These newly minted pension critics didn’t notice that companies could manage earnings by adjusting discount rates, dumping money into the plans, or cutting benefits. But they did notice that companies were using expected returns of between 8 percent and 10 percent. In 2002, for example, GM assumed a 10 percent return, even though assets actually lost 5.2 percent. Companies had been using the same 8 to 10 percent assumptions for years, including those when assets were earning 30 percent, but analysts acted as if they’d discovered the next Enron, and they cranked out even more reports. Even Warren Buffett, chairman of Berkshire Hathaway, weighed in, scolding companies for “legal but improper accounting methods used by chief executives to inflate reported earnings. The most flagrant deceptions have occurred in stockoption accounting and in assumptions about pension-fund returns. The aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom.”

The market plunge had smoked out accounting innovations at Enron, Lucent, Nortel, Tyco, Waste Management, and WorldCom, most of which involved management efforts to bump up the share price by manipulating earnings. Many of these practices involved “accrual accounting,” i.e., the way companies report such things as debts and reserves. Retiree benefits are a form of accrual accounting, too, subject to the same manipulation but not to the same scrutiny.⁹

CHAPTER 4

Health Scare: INFLATING RETIREE HEALTH LIABILITIES TO BOOST PROFITS

COMPANIES HAVE BEEN PLAYING even more elaborate games with their retiree health plans. These health plans are essentially medical pensions that employers have promised to decades of workers. If someone worked long enough to earn retiree health benefits, then, when he retired at fifty-five or later, his employer’s medical plan would continue to cover him until he qualified for Medicare at age sixty-five. Some plans, particularly for unions, provided a Medicare supplement, covering things like prescription drugs.

And then, in 1992, companies began sending letters to hundreds of thousands of retirees, all of which contained eerily similar messages: “Health care costs continue to skyrocket,” wrote McDonnell Douglas. Health care costs were “skyrocketing,” wrote R.R. Donnelley. In these letters, Sears, Caterpillar, Unisys, and scores of other employers, citing “spiraling” health care costs, all informed retirees that, regretfully, they had no choice but to cut benefits.

The companies blamed a new accounting rule—FAS 106—for the changes. The rule was similar to the one employers had adopted with pensions a few years earlier in that it required companies to estimate their obligations for the health coverage they would provide to retirees—current and future—and report the obligation to shareholders. When the companies did this, they claimed to be shocked to find that the costs were so high. This, they said, called for hard choices, and regretfully, they would have to cut benefits. It was a matter of survival.