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

ASA set up a separate cash-balance plan for itself, using assets from the AT&T Management Pension Plan, which provided ASA managers with 200 percent to 400 percent of the value of what they would have if they had remained under AT&T’s management plan.

Six months later, AT&T sold the Somerset, New Jersey, unit, ASA, to the managers for $50 million, and transferred $25 million in pension assets to ASA, more than twice the amount needed to cover the pensions owed. In 2000, two years after buying ASA from AT&T, Gulotta sold it to the giant insurance and benefits consultant Aon Corp. for $125 million. He remained a principal of the firm until his retirement.

Surplus pension assets have ended up in executives’ pockets in more creative ways. In late 2005, CenturyTel (now CenturyLink), a telecommunications firm based in Monroe, Louisiana, attached a list to its workers’ pension plan with the names of select individuals who would get an extra helping of pension benefits from the plan.

Normally, federal law forbids employers from discriminating in favor of highly paid employees who participate in the regular pension plan; everyone in the plan is supposed to have roughly the same deal. There’s also an IRS limit on the amount a person can earn under the plans. These restrictions are why companies provide separate, supplemental pension plans open only to executives.

But by using complex maneuvers that take advantage of loopholes in the discrimination rules, many companies do, in fact, discriminate in favor of their executives and exceed the statutory ceiling on how much they can receive from the plans.

CenturyTel used one of these techniques in its pension plan, which covered 6,900 workers and retirees, to boost the pensions of eighteen executives in the plan. One of them was chief executive Glen Post, who before the amendment had earned a pension of only $12,000 annually in the regular pension plan. But the increase bumped it up to $110,000 a year in retirement.

The technique doesn’t increase the executive’s retirement benefits. When the swap is made, the supplemental executive pension is reduced by an equal amount. The goal, rather, is to enable companies to tap pension assets to pay for executive pensions—and even their pay.

Intel, the giant semiconductor chip maker based in Santa Clara, California, used this method to move more than $200 million of its deferred-compensation obligations for the top 3 percent to 5 percent of its workforce into the regular pension plan in 2005. Thanks to this, when these executives and other highly paid individuals leave, Intel won’t have to pay them out of cash; the pension plan will pay them (more on this in Chapter 8).

Using these methods, companies have moved hundreds of millions of dollars of executive pension liabilities into the regular pension plans, and then have used pension assets originally intended to pay the benefits of rank-and-file employees to pay the additional pension benefits for executives. The practice exists across all industries: from forest products (Georgia-Pacific) to insurers (Prudential Financial) to banks (Community Bank System Inc.).

The practice has something in common with the practice of selling pension assets: Employers prefer to keep it under wraps, lest it spark a backlash when employees find out the CEO with millions of dollars in supplemental executive pensions is also getting an extra helping from the rank-and-file pension plan.

To “minimize this problem” of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it “only to employees who are eligible,” wrote a consulting actuary with Milliman Inc., a global benefits consulting firm. Covington & Burling, a Washington, D.C., law firm, advised employers to attach a list to the pension plan, identifying eligible executives by name, title, or Social Security number, along with the dollar amount each will receive. CenturyTel, People’s Energy Corp., and Niagara Mohawk Power Corp., a New York utility that’s part of London-based National Grid PLC, all used methods like this.

Initially, employers used these executive pension transfers as a way to use surplus pension assets, and some companies with overfunded pensions still do. To “take advantage of the Surplus Funds in the Pension Plan,” Florida real estate developer St. Joe Co. amended its employee pension plan in February 2011 to increase benefits for “certain designated executives.” These included departing president and CEO William Britton Greene, who was pushed out by a large shareholder. The amendment more than doubled the pension he’ll receive from the employee pension plan, boosting the lump sum amount from $365,722 to $797,349. Greene also received an exit package worth $7.8 million.