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

Companies giving their workforces makeovers tapped the pension plans to pay for another essential benefit: retiree health benefits. These health plans continue a retiree’s health coverage until age sixty-five, when Medicare kicks in. Employers don’t usually fund the plans, instead paying the cost of the coverage each year, the same pay-as-you-go arrangement used for medical plans for current employees. Thus, pulling cash from pension plans to pay for these costs enables companies to avoid using cash to pay the benefits. Over the past two decades, companies have also siphoned billions of dollars from their pension plans to pay for retiree health benefits.

DuPont pioneered the practice. It dipped into its pension assets on more than seven different occasions during the 1990s, drawing out $1.7 billion to pay for retiree health benefits. It also used “a significant amount” of surplus pension assets to finance a number of voluntary retirement programs. The market decline in the early 2000s erased what was left of the pension surplus. DuPont froze its pension starting in 2007, but that wasn’t enough to restore it to health, and by early 2011 the plan was $5.5 billion in the hole.

Employers had lobbied aggressively for the right to use pension assets for retiree medical benefits, which are called “420 transfers,” after the section of the tax code they fall under. They argued that if a plan had a surplus, why not use it to benefit the retirees? Congress agreed in 1990, but included some limits. To protect the pension plan, employers could withdraw the assets only if the plan had a surplus. But that didn’t stop employers from pulling money from their deteriorating pension plans anyway. Despite the market decline between 2000 and 2002, Allegheny Technologies, Qwest, and U.S. Steel continued to transfer millions of dollars from their pension plans to pay for retiree health benefits, moves that contributed to their subsequent deficits.

The practice continues. Prudential Financial transferred $1 billion from its pension plan in 2007 to pay for several years’ worth of retiree health benefits, and Florida Power & Light transferred more than $180 million from its pension plan between 2005 and 2010. Their pension plans remain well funded, but so, initially, did the pensions of the companies above.

SELLING SURPLUS ASSETS

Mergers, acquisitions, and spin-offs have also enabled companies to convert their surplus pension assets into cash. The strategy might be as simple as merging an underfunded pension plan with an overfunded one. But there are were less obvious ways to monetize the assets.

One strategy involves selling a unit to another company, then handing over more pension money than is needed to pay the benefits of the transferred workers and retirees, in exchange for a higher sale price. General Electric is a master of the practice. In 1993 it sold an aerospace unit to fellow defense contractor Martin Marietta. In the deal, it transferred thirty thousand employees and $1.2 billion in pension assets to Martin Marietta to cover the liabilities for their pensions. That was $531 million more than was needed to fulfill the pension obligations. By getting a better price for the unit because it came with the surplus, GE effectively got to put half a billion dollars from its pension plan into its pocket.

GE did dozens of such deals over the years, monetizing billions of dollars of pension assets. Thanks to this and other practices, the $24 billion in surplus in its plan in 1999 evaporated in the following years, and at the beginning of 2011 the plan was short $6 billion.

The Defense Department wasn’t asleep at the wheel during these deals. It sued GE to recover the surplus, because when the government provides money in its contracts to fund pension and retiree medical benefits, the company is supposed to return the money if it is not subsequently used for benefits. The money isn’t supposed to vanish into company coffers.

Contractors get around this by restructuring. If a contractor closes a segment, it has to hand the pension surplus to the government; but if the contractor sells the unit, it can turn the pension over to the acquirer and get some cash for the surplus out of the deal. The new owner can then close the segment, which is what Martin Marietta did to the GE unit it acquired. Government lawyers consider these to be sham transactions intended to help the contractor raid the pension, and the legal tugs-of-war between defense contractors and the government over the scalping of retiree assets have kept a generation of Justice Department lawyers busy for years.