Tags: Vultures | Profiting | From | Pension | Busts

Vultures Profiting From Pension Busts

Tuesday, 20 September 2005 12:00 AM

1. Vultures Profiting From Pension Busts

It's no secret that the once rock-solid American pension plan could be going the way of the dodo bird.

With high-profile corporate bankruptcies at once venerated U.S. firms like Bethlehem Steel, Delta, United Airlines and others, millions of employees could find out what the rest of the country's private-sector employers have known for years - you can't count on a company pension to finance your retirement.

It's a tough pill for many Americans to swallow, especially for those nearing or already in retirement.

Many have looked to the U.S. government for help when their companies abandoned their pension plans. In some cases, like that of United Airlines, the federal Pension Benefit Guaranty Corp. was able to step in and bridge some of the financial gap for employers and their pension obligations.

But such aid could be ending too.

That after last week's bankruptcy filings at Delta and Northwest showed that as much as $11 billion could be added to the record deficit at the Pension Benefit Guaranty Corp., which insures pensions for 44 million U.S. workers.

The agency is already groaning under the weight of severe financial pressures. A report released Thursday by the Congressional Budget Office estimated that the agency's shortfall will reach nearly $87 billion over the next decade, $119 billion in 15 years and $142 billion over 20 years.

The PBGC, created in 1974, receives no funds from general tax revenues. Its operations are financed largely by insurance premiums and investment returns, says the agency's web site.

And now The New York Times claims that the PBGC could be the target of corporate takeover artists bent on manipulating government rules on pension relief to pocket billions of dollars.

In the September 18 edition of The Times, reporter Mary Williams Walsh points to turnaround artist Robert S. Miller.

"As chief executive of Bethlehem Steel in 2002, Mr. Miller shut down the pension plan, leaving a federal program to meet the company's $3.7 billion in unfunded obligations to retirees. That turned the moribund company into a prime acquisition target. Wilbur L. Ross, a so-called vulture investor, snapped it up, combined it with four other dying steel makers he bought at about the same time, and sold the resulting company for $4.5 billion…"

Walsh concludes that within three years, Ross ended up with a return that exceeded 1,000%, after he had spent only $400 million to acquire all five companies.

Walsh reports that Miller left the PBGC holding the bag for the company's pension obligations.

Evidently, Miller has his sights set on other cash-strapped companies, and he's once again using the PBGC as his own personal ATM - and the agency seems to invite such abuses, The Times reports.

"The Pension Benefit Guaranty Corporation has become an increasingly popular option for private-capital funds and other investors who are seeking to spin investments in near-bankrupt industrial companies into gold. The key is to shift the responsibility for pensions, which weigh as heavily as bank loans on a company's balance sheet, to the pension corporation," says the article."

The Times goes on to say that other companies, including Polaroid, U.S. Airways and other numerous firms, are performing similar "financial alchemy." But Walsh says bankruptcy specialists insist it almost sure to keep happening "because shedding pensions - and pensioners' health care obligations - is turning into an irresistible way to make a high-risk investment pay off."

"It's become a kind of system to bail out companies," says Thomas Conway, vice president of the United Steel Workers of America, in the Times article.

"People have been able to use it tactically, as a business strategy, and I don't think that's what Congress meant."

While no specific figures are available showing how much money is being scraped off the table due to pension defaults, the fallout appears huge.

According to The Times, in 2004, the PBGC had $39 billion in assets and $62.3 billion in liabilities, leaving a shortfall of $23 billion. But the Congressional Budget Office on Friday estimated that the deficit will widen to $86.7 billion by 2015 and $141.9 billion by 2025.

Naturally, Congress is concerned about companies sliding away from their pension obligations. But Congress has been inept in handling the pension crisis - in many cases enacting legislation that allows companies to skate on their pension payouts, opening the door for hucksters to buy struggling firms and leave Uncle Sam with the pension debt burden.

In a June 2005 white paper by Martha Paskoff Welsh that appeared on the Century Foundation's web site, the author takes Congress to task for paving the way for the pension troubles American employees and taxpayers are now facing:

"Many members of Congress reacted with outrage when a federal bankruptcy court ruled earlier this year that United Airlines could default on its $6.6 billion in pension obligations to 120,000 employees and retirees. Realizing that United's default probably is just the start of a trend among struggling companies - including most of the older airline companies and even General Motors - many legislators are crying foul and are calling for reform."

But, she says, the Congress' own voting record on the subject provides a clear explanation for the current crisis.

"Congress repeatedly has passed legislation that enables corporations to underfund their pensions, overstate their profits, and postpone to another day any action that would lead them to keep their promises to employees. At the same time, Congress has passed laws making it more difficult for struggling workers and retirees to file for bankruptcy protection. The pattern is consistent: give business the breaks they need to avoid responsibilities to their employees while cracking down on households in trouble."

Welsh also points out that, in recent years, Congress has made it easier, not harder, for corporations to shirk their pension obligations.

"Companies routinely and legally underfund their pension obligations, leaving many employees and retirees with little to bank on, and with little in the bank," says Welsh.

"While corporations are required to contribute to their employee pension plans, the actual level of funding easily can be manipulated by company officials."

She cites a May 2005 study by economists from Harvard and MIT, who determined that is all too common for well-respected companies in good standing - firms like IBM - to "routinely divert assets away from their pension plans to make overall company performance look better than it actually is."

The fallout from pension troubles could see many employees left in the lurch, with the U.S. taxpayer left holding the tab.

What's worse is that the situation isn't getting any better.

According to David Walker, comptroller general of the United States, "over half of the 100 largest plans were underfunded, and almost one-fourth of the plans were less than 90% funded" since 2002.

As Welsh points out, the PBGC can only handle so much debt load.

"The fact of the matter is, even the PBGC is struggling, confronting a record $450 billion in pension obligations - up from $50 million just a few years ago - on which companies have defaulted. Ultimately, it is almost certain that a major Congressional bailout will be required if the guarantees of the PBCG are to be realized."

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3. Unified Managed Accounts: The Next Big Thing?

While Wall Street went gaga over separate accounts and their myriad privately managed account offspring, it appears few Americans felt the same way.

Studies show that the privately managed-account market is stuck at about the $1 trillion level in the United States - not a bad number on its own, but nothing compared to the $7 trillion stowed way in U.S. mutual funds.

But that's not stopping financial advisers from talking up Unified Managed Accounts, the next big thing in financial planning.

Billed as a single managed account that would encompass every investment vehicle in an investor's portfolio - including stocks, bonds, mutual funds, separate accounts, exchange-traded funds (ETFs), hedge funds and more - Wall Street observers are predicting a big rise in UMAs.

"This kind of account truly represents a revolution in how money is managed for the individual investor," says Ron Cordes, chairman of AssetMark Investment in Pleasant Hill, CA. 

Cordes adds that, thanks to technology, investment services and products formerly reserved for the ultra-affluent and institutional investors are now accessible to average investors - who are increasingly demanding them. 

Advocates like Cordes say that the UMA is an attractive alternative for money management, especially when compared to the better-known separately managed account. Both allow investors to incorporate mutual funds, exchange-traded funds, single stock holdings and managed accounts into a single account - and then rebalance them automatically, the way mutual fund wrap accounts do.

The word on UMAs is that they offer investors more diversity.

Traditional separate accounts require three brokerage accounts, whereas the UMA simplifies administration by consolidating separate accounts into one, with a single statement. UMA backers say that being able to incorporate so many other asset classes into the account makes it easier for investors to achieve more complete diversification at lower minimums.

What's more certain is that the move away from commissions to assets under management is shifting into higher gear.

Says TowerGroup senior analyst Matt Schott: "Institutions that were a little slower to move in that direction are seeing the money that's going to managed accounts, mutual fund wrap-type products and fee-based brokerage."

4. Employers Boost Bonuses to Weed Out Talent

Funding for short-term incentives (STIs) such as annual bonuses increased significantly in 2005 to nearly 100% of targeted payouts, according to a new survey conducted by Watson Wyatt and WorldatWork.

At the same time, however, companies are making it more difficult for employees to earn a bonus by increasing company financial performance goals and individual employee targets.

The survey of 265 large companies found that funding levels for the 2005 STI/bonus cycle averaged 99% of target, compared with 81% in 2004 and 91% in 2003. 

The survey also found significant differences in STI funding between high- and low-performing organizations: Companies with strong financial performance funded at an average of 118% of target, while less successful firms funded at an average of 93%.

"The improved economy and stronger corporate performance are driving higher bonus funding, and that's good news for both employers and employees," says Laura Sejen, director of strategic rewards consulting at Watson Wyatt. "It especially allows employers to better reward top-performing employees and attract and retain key talent."

More than half (54%) of organizations increased their company financial performance targets last year, effectively raising the bar for employees to receive awards. 

Financially successful firms were more aggressive, with nearly two-thirds (64%) increasing company financial goals. A complementary survey of 1,100 workers found that most employees agree, with 55% indicating that it has become more difficult to earn a full bonus over the past three years.

"Employers are clearly recognizing the value of getting the right money to the right people," says Sue Holloway, senior compensation manager at WorldatWork.

"With higher financial performance targets, employers can make sharper pay distinctions in employee pay and more strongly align employee performance with organizational results."

If sharper distinctions mean less bonus money for employees, then Holloway is on to something.

The Wyatt study reports that despite significant plan redesigns in the last two years, roughly one-third of companies continued to make changes to their non-executive plans in 2005. 

Among these companies, 52% reduced the number of stock options granted, 50% reduced eligibility and 27% eliminated stock options entirely. Overall, 14% of companies reduced long-term incentives as a percentage of total pay for non-executives, and only 31% of these adjusted any element (e.g., short-term incentives) upward to compensate.


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1. Vultures Profiting From Pension BustsIt's no secret that the once rock-solid American pension plan could be going the way of the dodo bird. With high-profile corporate bankruptcies at once venerated U.S. firms like Bethlehem Steel, Delta, United Airlines and others,...
Tuesday, 20 September 2005 12:00 AM
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