Tonight's reading...an excerpt from "Retirement Heist" written by Ellen E. Schultz
One common use of pension assets has been to finance restructurings. In 1994, Bell Atlantic, formed after the breakup of the Baby Bells in the early 1980s, was transforming not only its technology, but also its workforce. In 1994, it had 100,000 employees, many of whom had been on the job for decades. This was exactly the cohort that many industries, including the fast-changing telecom sector, were eager to whittle down. Workers were in their peak earnings years, and the value of their pensions, which was based on tenure, was about to spike. Severance is typically paid for with cash, so shedding this large cohort would be costly.
Fortuitously, Bell Atlantic had a lushly overfunded pension plan, and like many companies, it offered to sweeten the pensions of those it was letting go. Over the next six years the company used $3 billion in pension assets to finance early-retirement incentives for 25,000 managers. Using pension surplus not only saved the company cash but saved payroll taxes, because, unlike severance pay, money paid from a pension in lieu of severance isn't subject to the 7.65 percent Social Security (FICA) taxes.
Pension law doesn't allow companies to use pension assets to pay severance, so companies characterized the payments as "termination benefits," "shutdown benefits," or "additional pension credits" that might provide people additional years of service or the equivalent of, say, an additional year of an employee's pay.
Bell Atlantic merged with GTE (formerly known as General Telephone & Electronics Corp.) in 2000 and changed its name to Verizon Communications, but the pension withdrawals continued. Over the next five years, Verizon continued to pay for retirement incentives using pension assets, even though the surplus, which had peaked at $24 billion in 2000, had shrunk to only 1.7 billion by the beginning of 2005, thanks to market losses and company withdrawals.
Verizon then had to make a critical decision: It could stop withdrawing assets to finance layoffs, and let the pension plan rebuild its cushion of assets to provide employees and retirees with greater retirement security. Or it could cut pensions, which would lop off some of the liability, making the plan better funded.
The company chose the latter strategy, and froze the pensions of its fifty thousand management employees. The move eliminated $3 billion in liabilities from the books and replenished the surplus. Of course, Verizon didn't describe the transaction that way. "This restructuring reflects the realities of our changing world," Verizon chairman and CEO Ivan Seidenberg said in a statement announcing the change. "Companies today, including many we compete with, are not adopting defined benefit pension plans." Verizon subsequently withdrew $5 billion from the surplus, and the 2008 market crisis wiped out the rest. By early 2011, the plan had a deficit of $3.4 billion.
Seidenberg wasn't affected by the pension freeze. His supplemental executive pensions and deferred-compensation plans had grown to $96 million by the beginning of 2011.
And that is all for tonight my Little Lambs. You have a big day tomorrow, saving the world from the Evil Union.
Sleep tight! Don't let the bedbugs bite!