and figured she was better off having nothing more to do with the IBM pension plan.
Employee advocates, including the Pension Rights Center and AARP, demanded better disclosure rules, but employers fought back. Lobbyists for the American Society of Pension Actuaries, the ERISA Industry Committee, and the U.S. Chamber of Commerce told Senate staffers that employees would only become confused if they were presented with too much complex information, and that providing more disclosure would be a “daunting task.” Lawmakers didn’t completely buy this, so in 2004 the IRS began requiring employers to tell people more clearly if the value of the lump sum wasn’t equal to the monthly pension.
In 2006, the Pension Protection Act banned wear-away prospectively, meaning that if an employer set up a cash-balance plan after the 2006 law went into effect, it couldn’t include a wear-away period.
But the issue of pension deception is still playing out in the courts. Cigna employees, who hadn’t been told their pensions were essentially frozen when the company changed to a cash-balance plan, sued the company in 2001. In 2008, a federal court concluded that Cigna deliberately deceived its employees when it changed its pension plan in 1998, gave them “downright misleading” information about their pensions to negate the risk of an employee backlash. “CIGNA’s successful efforts to conceal the full effects of the transition to [the new pension] deprived [plaintiffs] of the opportunity to take timely action… whether that action was protesting at the time [the change] was implemented, leaving CIGNA for another employer with a more favorable pension plan, or filing a lawsuit like this one.”
The district court ordered Cigna to restore the pension benefits it had led employees to believe they would be receiving. Cigna appealed to the Second Circuit, and lost, but that wasn’t the end of it. Cigna didn’t try to appeal the court’s finding that it deceived its employees—the memos and documents that surfaced in the case were too damning.
But in a kind of hail Mary pass, Cigna appealed to the Supreme Court, arguing that in order to get the benefits, each individual employee must prove he’d acted on the misinformation–that is, didn’t change jobs or save more money, and thus suffered financial harm.
During oral arguments before the Supreme Court late in 2010, it became clear that the majority of justices were troubled by the fact that if they adopted the “detrimental reliance” standard Cigna was advocating, then employers would suffer no consequences even for the most egregious deception. “Doesn’t this give an incredible windfall to your client, Cigna, or to other companies that commit this kind of intentional misconduct?” Justice Elena Kagan asked Cigna’s attorney. In May 2011, the justices sent the case back to the lower court with instructions that it review its decisions, based on the portion of pension law that requires employers to tell employees, clearly and unambiguously, when it is cutting their pensions.
If the judge comes to the same decision to award the benefits to the employees—a total of $82 million—this would be the biggest award for employees whose employer hid pension cuts.
But Cigna has already taken steps to soften the blow: It froze the pension plan in 2009 and cut health, disability, and life insurance benefits for retirees, giving it a gain of $92 million.
Chapter 3
PROFIT CENTER
IN ACTUARIAL CIRCLES, there’s a joke that goes something like this: A CFO is interviewing candidates for a job as a benefits consultant. He calls the first one, an accountant, into his office and asks, “What’s two plus two?” The accountant says “Four.” The CFO sends him away, calls an actuary into the room, and asks, “What’s two plus two?” The actuary closes the door, pulls down the blinds, then leans in and whispers, “What do you want it to be?” He gets the job.
As much as this anecdote unfairly maligns the vast majority of actuarial professionals, it nonetheless sums up the view that some in the profession have toward their more aggressive brethren. Until the 1990s, benefits consulting firms generally handled standard pension tasks, like helping companies figure out how much to put into their pension plans, based on the ages and life expectancies of their employees, plus other factors. More closely aligned with the human resources department, they were one of the costs of operating a business, like accountants and the janitorial staff. But over the next two decades, large benefits consulting firms began aggressively marketing themselves to the finance departments. Their pitch? They could help employers turn pension plans into profit centers.
Their primary tools included the new accounting rules[8] that employers implemented in 1987, which require employers to disclose the size of their pension obligations, as they do other kinds of debts, and show how these pension debts affect income each quarter. Though the new accounting standard, FAS 87, was intended to increase transparency—allowing shareholders to see the full liability on a company’s books—it was the beginning of the end for pensions. Before the new rules went into effect, employers got only one benefit from cutting pensions: The money that would someday have been paid to retirees would instead remain in the pension plan. Under the new accounting rules, employers got a second benefit when they cut pensions: Reducing the liability generated gains. These are paper gains, not cash, but when it comes to calculating earnings, the gains are treated the same as income from selling software or trucks. IBM’s pension cuts in 1999 reduced its pension obligation by $450 million, resulting in a pot of gains worth roughly $450 million that the company could add to income either right away or over time. IBM added $200 million of these gains to its 1999 income.
The ability to convert pension benefits that would have been paid out to retirees over the coming decades into immediate profits for shareholders, today, changed the game: Pension plans weren’t just piggy banks to tap for cash. They were also cookie jars of potential earnings enhancements.
It works something like this: Let’s say a person earns $1,000, but he and his employer agree that he won’t be paid until next year. Under FAS 87, this IOU is a debt, which the employer records on his books: Deferred compensation, $1,000.
But what if the employer decides to cut the employee’s salary to $600 after the company has already recorded this debt on his books? Two things happen. The following year, the employer pays only $600—a cash savings of $400—and enjoys a secondary benefit: It has reduced its debt by $400. Under accounting rules, a forgiven debt is recorded as a gain, and boosts income.
To see how this plays out in the retirement heist, add a few zeros to the $400 and think of the deferred pay as a pension: You’re earning it today, but it will be paid later. Add ten thousand colleagues and the resulting obligation is billions of dollars. Reducing that obligation by $400 million generates gains.
PENSION TEMPTATION
There’s nothing magical about these accounting rules. What made pension debt different from other kinds of debt was that it was easier to erase. A company that borrows $100 million to build a factory can’t later wave a wand and make the debt go away; it can restructure the debt, or shed it in bankruptcy, but otherwise it’s sticking around.
Pensions are different. Companies have a lot of leeway to change the benefits, and thus the size of the pension debt—but not all of it: A company can’t touch the retirees’ monthly checks. And it can’t take away amounts people have already earned. But it can slow the growth of their pensions or halt it altogether by freezing the plans or laying off workers. This explains why, even when a pension plan has plenty of money, a company will profit if it cuts benefits.
It didn’t take benefits consultants long to realize that every dollar a company had promised a retiree—for pensions, prescription drugs, dental coverage, life insurance, or death benefits—was the equivalent of a dollar that
