of retirees from a variety of companies when it merged with Amoco. In 2000, it hired a new pension administrator, Fidelity Investments Institutional Operations Co., which handles benefits plans covering about nineteen million employees and retirees. The BP plan, thanks to its promiscuous rounds of acquisitions and mergers, had close to fifty thousand U.S. retirees, plus seventy thousand workers and former employees who’ll get pensions someday. Fidelity audited the plan in 2004 and concluded that 316 retirees had mistakenly been paid a total of $100 million that some other predecessor company owed. BP began the process of recouping the money.
One of the retirees was Charlie Craven, a retired mine supervisor in Tucson. Craven had been receiving a pension of $346 a month for eighteen years, until January 2005, when, instead of a pension check, he received a letter from Fidelity informing him that a recent audit revealed he was receiving benefits in error.
“You must repay the overpayment of $18,363 in one lump sum by January 21, 2005. If you are unable to make a one time lump sum repayment and wish to set up a repayment plan, your payments are as follows: $1,530 per month for (12) months.” The letter added: “If you do not comply within the stated timeframe, the plan sponsor may take additional steps to correct this overpayment…. Such steps might be to reclassify the [overpayment] as miscellaneous income,” issue a corrected 1099-R, and report him to the Internal Revenue Service, “or take more formal collection action against you.”
“I thought when you retired, that was it,” Craven said. “How can they come to me all these years later and tell me this?” Craven, a widower with macular degeneration who is nearly blind, had a friend read him the letter, which said that a company called Foundation Coal Corp. should have been paying Craven’s pension, and directed him to write to Foundation Coal, in Linthicum Heights, Maryland, for information about his benefit. In the meantime, he needed to begin repaying the debt to BP. “Please accept our apologies for any inconvenience this may have caused,” the letter concluded.
Craven had never heard of Foundation Coal. He’d earned the pension working for Cyprus Mines, a copper- and-minerals company, and had bounced among several mines in Arizona and Nevada over the years. He didn’t know which company bought what; he only knew that his check had been coming from BP.
He was still thinking about this dilemma two weeks later when a second letter from Fidelity Investments arrived, reiterating the demand for repayment. This letter, like the preceding one, was delayed because it had been sent to his prior address in Kingman, Arizona. This second letter noted that Craven had originally earned his pension under the Amoco pension plan, which had merged with the BP plan, “but the liability for that benefit and the associated pension assets were subsequently transferred to Cyprus Minerals in 1985… and therefore not payable under the BP pension plan. This letter didn’t mention Foundation Coal, but directed him to write to Fidelity Investments in Cincinnati or call a toll-free number. Craven asked his friend Ruth Emley, a widow from Nevada he’d met online, to make the call. Ruth, who, like Craven, was seventy-nine at the time, called but got an automated system and was put on eternal hold. “We never got to talk to anyone there,” Ruth said.
This second letter told Craven that if he disagreed with the demand for payment, he should send a claim, “stating specific grounds upon which your request for review is based,” along with supporting documents, to BP’s claims-and-appeals coordinator in La Canada Flintridge, California. By the time he got the second letter, Craven had been without his pension for three months.
So who should have been paying Craven’s pension? Even if Craven had been able to see, his computer was broken, and his research skills were limited. His math wasn’t so great, either: He hadn’t noticed that eighteen years of monthly payments of $346 added up to a lot more than the $18,363 Fidelity’s letter was demanding. Like many retirees, he had not followed the mergers-and-acquisitions activity of his former employer, and kept few records (or, in his case, no records, other than canceled checks). His companion, Ruth, started digging through old boxes of canceled checks and looked in the Yellow Pages under “Senior,” hoping to find someone to help.
Though Craven was a little hazy on his employment history, this is what records later showed. He first went to work at a company called Cyprus Mines in 1962 and left in 1979, the year Amoco Corp. bought the company. He returned to Cyprus two years later and retired in 1985. The year he retired, Amoco spun off Cyprus as an independent company called Cyprus Minerals, transferring to it the pension liabilities of current employees. Cyprus Minerals began paying Craven a pension for his last five years of work, $52 a month. In 1993, Cyprus Minerals Co. merged with Amax, forming Cyprus Amax Minerals Co. Phelps Dodge Corp. acquired Cyprus Amax Minerals Co. in 1999 and continued paying the small pension. Meanwhile, Craven also had begun receiving a second monthly pension for his earlier work stint, for $348. Amoco paid this, and when Amoco became part of British Petroleum in the late 1990s, the combined company paid this second pension. Got it?
By the time BP acquired the portfolio of old miners, it had already passed through so many hands that the pedigrees of many of the pensions were in question. Benefits audits rarely turn up any mistakes in the retirees’ favor. As it turned out, though, there
LUCENT’S SPIN JOB
Recovering overpayments is just nickel-and-dime stuff when it comes to managing a portfolio of retirees for cash and profits. No one has done a better job at squeezing retirees than Lucent, the AT&T spin-off. Over its short life, Lucent reaped billions of dollars in cash savings and profits from its retiree portfolio, even as the company persistently maintained—to analysts, shareholders, employees, retirees, and lawmakers—that its 130,000 retirees were crushing the company. The argument sounded plausible. Lucent had five retirees for every worker, putting it in the same club as automakers and steel companies. But whatever financial problems Lucent was having, the retirees weren’t the cause. They were merely the scapegoats.
Lucent was created in 1996 when AT&T spun off its equipment-manufacturing business, including Western Electric and Bell Laboratories, along with their more than fifty thousand retirees. These included telephone operators and linemen, middle managers, engineers who developed missile systems, transistors, lasers, and fax machines, and the factory workers who built them. Some had been retired for months; many had been retired for decades. Some had worked for the business units included in the spin-off, and others had worked in other parts of AT&T.
Loading up the retirees into a new unit and spinning it off enabled AT&T to unload a $29 billion liability for pensions, health care, dental coverage, and death benefits. But the retirees weren’t a burden to the newly formed company: The retiree portfolio also contained a $29.8 billion pension fund, and two trusts to pay retiree health benefits. All told, Lucent started out with $33.5 billion in assets, to cover a $28.7 billion obligation. In short, the company started out with almost $5 billion more than it needed to pay 100 percent of the retirees’ benefits.
Lucent, nevertheless, began trimming benefits. It cut the salaried employees’ pensions in 1998, and in 1999 it eliminated discounted longdistance phone rates for anyone who retired after 1983. The move, combined with other changes, lessened the retiree-benefits obligation on Lucent’s books by $359 million.
Pension cuts and the telecom bubble caused the assets in Lucent’s pension plan to balloon. At its peak, in 2000, it had $45.3 billion in assets—a surplus of almost $20 billion. The vast pool of pension assets boosted Lucent’s income by hundreds of millions each year, from $265 million in 1996 to $975 million in 2000. By 2003 it had added an additional $1.6 billion to income.
In its early years, Lucent focused on growth: acquiring companies, hiring people, borrowing heavily, and generally operating as if the roaring telecom market would last forever. It didn’t. When the bubble burst in 2000, demand for telecom products and services fell sharply, and Lucent began frantically downsizing. It spun off business units, made early-retirement offers, and cut staff, which the pension plan helped pay for. The company used $800 million in surplus pension assets to pay termination benefits as it cut 54,000 employees from its payroll in 2001 and 2002. It learned this move from parent AT&T, which in 1998 had provided 14,700 managers the equivalent of one half-year’s pay, in the form of a cash payout from the pension plan, as severance. At Lucent, the move consumed $4.7 billion in pension assets. By 2003 Lucent’s workforce had shrunk from 118,000, in 1999, to 22,000.
