Watson Wyatt epitomized the new breed of benefits consultants that was revolutionizing the compensation-and-benefits landscape. In prior decades, benefits specialists handled the garden-variety tasks of pension administration and human resources consulting. That began to change in the 1980s as consultants began more aggressively prospecting for business and developing niche specialties in cutting retiree benefits, boosting executive compensation, and managing mass layoffs and early-retirement windows.
Watson Wyatt was particularly innovative. It developed a suite of demographically inspired services specifically aimed at helping employers evaluate—and reduce—the cost of their older workers. One service was the firm’s “Aging Diagnostic,” which marketing material described as “a tool designed to measure how the cost of compensation and benefits is affected by an aging workforce, so organizations can detect this trend early… and begin managing it, before it manages them.”
With one baby boomer turning 50 every eight seconds for the next 10 years, the economic issues of an aging workforce could become a major issue for your company. For every 50-year-old employee in your company, you are likely to pay:
• Twice as much in health care as for a 30-year-old.
• More in base salary and vacation leave, because of longer job tenure.
• Up to twice the employer match on defined contribution deferrals than you would for a 20-year-old, due to higher participation and savings rates.
• More than twice the pension plan contribution rate that you would pay for a 25-year-old.
• Companies that manage this trend early—before it manages them—will create a significant competitive advantage…. That’s where Watson Wyatt’s Aging Diagnostic TM comes in. Our state-of-the-art modeling system uses your data and the latest demographic research to project the total impact of an aging workforce on your compensation and benefits costs…. Companies that want to combat the cost spiral of changing demographics should take a careful look at their current workforce demographics, hiring practices and benefits design, paying special attention to retirement packages.
With little fanfare, IBM rolled out the pension equity plan in 1995 and heard not a peep from the employees. Three years later, it was ready for yet another pension cut. This time it decided to convert the pension equity plan to a cash-balance plan. IBM’s consultants at Mercer Human Resource Consulting and Watson Wyatt calculated that when it switched to the cash-balance plan, approximately 28,300 older IBM employees would stop earning pension benefits for one to five years, while younger employees would begin to build benefits immediately. The net result, though, would be that the pension plan would pay out $200 million less, and most of the savings would come from older, long-service employees, like Dave Finlay.
Finlay was exactly the kind of employee the company was taking aim at: He was fifty-five and had been at the company twenty-six years. As a senior engineer, he had a comfortable, though not lavish, salary. He expected his pension to be the same, and it would have been if IBM hadn’t engineered its series of secret cuts. He began to figure this out in early 1999, after he got a brochure from IBM in the mail announcing that the company was modifying its pension plan to make it “more modern, easier-to-understand, and better suited for a mobile workforce.” Finlay was close to retirement, so he scrutinized the document, trying to figure out how the new pension compared with his old one. The description of the new pension was thin on details, noting only vaguely that employees “will see varying effects” and that those retiring early will “see lower value.” Not good enough.
Finlay went to the internal company Web site, where IBM had long offered a “Pension Estimator” that enabled employees to estimate how much their pension was—and would be—worth, depending on how long they’d worked, their estimated annual pay raises, and other factors. But IBM had taken the pension tool offline. When Finlay called administrators in IBM’s human resources department to complain, they told him the company had taken the estimator down because “it really does not seem appropriate to be modeling a plan that no longer exists.”
This response was common. The corporate finance departments that hatched these schemes typically kept most of the lower-level human resources managers and peons in the dark and fed them the same hooey they served up to the employees. For example, when IBM switched to a pension equity plan a few years earlier, it had sent a memo to managers stressing that the new pension equity plan was “the result of a recent study which concluded that the plan should be modified to meet the evolving needs of IBM and its increasingly diverse work force, and align more with industry practices and trends.” It didn’t tell the HR staff any more than it told the employees that it was cutting pensions (including theirs) and that it was doing so to keep more money in the plan to enrich the company.
After getting no help from the benefits administrators, Finlay began to suspect that IBM was hiding something. Though Finlay didn’t have the online pension estimator at his disposal, he had saved every benefits booklet, announcement, statement, and handout he’d ever received since he joined the company in 1972 and was able to reconstruct the estimator. It became a personal challenge. For weeks, he bicycled home from work to his subdivision on the outskirts of Boulder, Colorado, and stared at his computer until nearly midnight. He spent weekends developing spreadsheets and reverse-engineering the algorithms with the information he hauled up from his basement. Finlay eventually figured out that the earlier 1995 change, one that he hadn’t examined so thoroughly, had reduced his prospective pension from about $69,500 a year to about $57,700, a 17 percent drop. And the latest switch would cut his annual pension a further 20 percent, to about $45,800.
Finlay showed his spreadsheets to his manager and suggested sending them to the human resources department. Don’t bother, his manager said: The human resources people wouldn’t believe his figures and would tell the managers that he didn’t know what he was talking about. At that point, the self-described Republican and Vietnam vet was steamed enough, he said, that he would have joined a union if the company had had one.
BACKLASH AT BIG BLUE
To make up for the loss of the pension estimator, some IBMers launched a Web site on Yahoo! to compare notes and air gripes about the anticipated change. Finlay posted his spreadsheets and calculations, which gave his colleagues a way to measure how much their pensions would shrink. The site began getting fifteen thousand hits a day as many of IBM’s 260,000 employees around the world began picking apart virtually every actuarial assumption related to IBM’s calculation of benefits. “I’d like to think this group is too intelligent and motivated to let a bunch of corporate actuaries sell us down the river and think we’re too stupid to figure out their half-truths,” noted NiceGuys-Win-in-the-End.
The HR department was not popular. “The mathematically disadvantaged half-wits in HR can’t hold up a conversation on the topic of calculating anything,” remarked IBM-Ghost. “They are more like used-car salesmen trying to sell a car with a sawdust filled transmission (my apologies to any used-car salesmen as you probably have more integrity than HR),” wrote idontknowaboutyou.
CEO Louis Gerstner was unpopular, too. One employee suggested hiring an airplane to drag a banner over the IBM facilities in Silicon Valley during lunchtime, with the message HEY LOU, “THOU SHALT NOT STEAL.”
Meanwhile, IBM insisted that it was instituting the change to make the plan more “modern” and not to save money. This was a common, though disingenuous, claim. Sure, IBM wasn’t literally saving money, because it wasn’t spending any money. (The pension plan was overfunded.) Rather, the pension cuts were enabling the company to keep $200 million, which otherwise would have gone to pay benefits to long-term employees.
Another popular whopper used by Lucent, AT&T, and so many others, was that the change wouldn’t reduce a person’s retirement benefits. What they didn’t say was that in these calculations, they were also counting 401(k) savings as “pension benefits” and assuming that employees would be contributing a large percentage of pay that would receive double-digit returns. So, yes, the pension change wouldn’t, perhaps, collectively reduce the employees’ retirement benefits, as long as one included the fantasy portion. The pension change took place anyway, in July 1999, but employees didn’t drop their demands that the company change it back. The irony was that they wanted IBM to change the cash-balance plan back to the pension equity plan, which the employees didn’t realize—then or before—had already cut their pensions.
Employees formed the IBM Employee Benefits Action Coalition, which began to complain to the Equal Employment Opportunity Commission (EEOC), the IRS, Congress, and anyone else who would listen. August is usually a slow month that finds lawmakers at state fairs and pie-judging contests, but that year lawmakers in areas
