manufactures industrial machinery), PMI Group (a mortgage insurer), ITC Holdings, and Johnson Controls.

TERMINATORS

When it comes to siphoning pension assets, nothing beats terminating the piggy bank and grabbing the entire surplus at once.

This maneuver was common. In the 1980s, employers terminated more than two thousand overfunded pension plans covering over two million participants and snatched surplus assets in excess of $20 billion. Some were inside jobs. Occidental Petroleum terminated its pension in 1983 and paid no income tax on the $400 million in surplus it captured because the company had net losses that year.

Other pension plans fell victim to pension raiders like financier Ronald Perelman, who took over Revlon in 1985, killed the pension plan, and nabbed more than $100 million in surplus pension assets, and Charles Hurwitz, who took over Pacific Lumber, closed down its pension and used $55 million in surplus pension assets to help pay off the debt he took on with the leveraged buyout. To stop these abuses, Congress slapped a 50 percent excise tax on “reversions” in 1990, and pension terminations at large companies slowed almost to a halt. But there was a huge loophole (there always is): A company that terminated its pension could avoid the onerous 50 percent excise tax—and pay only 20 percent—if it put one-quarter of the plan’s surplus into a “replacement plan.” A replacement plan could be another pension. Or it could be a 401(k). The only restriction was that companies allocate the surplus into employee accounts within seven years.

Montgomery Ward was a big beneficiary of this loophole. The stodgy retailer, struggling to compete with low-cost giants like Kmart and Wal-Mart, filed for bankruptcy protection in 1997. Its $1.1 billion pension plan was especially fat, because two years before its bankruptcy filing, Montgomery Ward cut the pension benefits by changing to a less generous plan. This reduced the obligations, and thus increased the surplus.

The company then terminated the pension plan and put 25 percent of the $270 million surplus into a replacement 401(k) plan. It paid the 20 percent excise tax, and the remaining $173 million of the surplus went to Ward income-tax-free, because the company had net operating losses. Ward used the money to pay creditors—the largest of which was the GE Capital unit of General Electric. It emerged from bankruptcy in 1999 as a wholly owned subsidiary of GE Capital, its largest shareholder.

The employees didn’t have much time to build up their 401(k) savings: The company went out of business in early 2001, closed its 250 stores, and laid off 37,000 employees. What about the 20 percent of surplus assets set aside to contribute to employee accounts? The $60 million or so that hadn’t yet been allocated to employee accounts went to creditors, not employees. Creditors have often ended up with the pension surplus. Around the time Montgomery Ward was fattening its plan for slaughter, Edison Brothers Stores, a St. Louis retailer whose chains included Harry’s Big & Tall Stores, entered Chapter 11. It killed the overfunded pension plan in 1997 and set up a 401(k). After paying the 20 percent excise tax, Edison Brothers forked more than $41 million in pension money over to creditors and emerged from bankruptcy. Its employees had even less time to build a nest egg in their new 401(k): The company liquidated in 1998.

These strategies ought to make it clear that many companies were terminating pension plans not because the pensions were underfunded or a costly burden, but because the pension plans were fat and the companies themselves were in financial trouble. The icing on the cake was that a company with losses would pay no income tax on the surplus assets.

It also puts a less savory spin on the origin story of the 401(k): Companies like Enron, Occidental Petroleum, Mercantile Stores, and Montgomery Ward didn’t adopt 401(k)s because they were modern savings plans employees were supposedly lusting after; their 401(k)s were merely the bastard stepchildren of dead pensions.

BLACK BOX

Lack of a pension surplus hasn’t stopped employers from raiding their pensions. Even if a plan has no fat, companies have been able to indirectly monetize the assets using the bankruptcy courts. Struggling in the wake of September 11, US Airways filed for Chapter 11 in 2003 and asked the bankruptcy court to let it terminate the pension plan covering seven thousand active and retired pilots. The airline estimated it would have to put $1.7 billion into the plan over the coming seven years, a burden that it said would force it to liquidate. David Siegel, US Airways’ chief executive, told employees in a telephone recording that the termination of the pilots’ plan was “the single most important hurdle for emerging from Chapter 11.” He said the move was regrettable but maintained that “the future of the airline is at stake.”

Few challenged the “terminate or liquidate” statement. Cheering the move were US Airways’ creditors, lenders, and shareholders with a stake in the reorganized company, because removing the pension plan would wipe out a liability and make the company more likely to emerge from Chapter 11 in a position to pay its debts and provide a return to its shareholders. Other cheerleaders were the Air Transportation Stabilization Board, which was poised to guarantee loans to the carrier, and the airline’s lead bankruptcy lender, Retirement Systems of Alabama, which stood to gain a large equity stake in US Airways when it emerged from Chapter 11. They accepted, without question or independent confirmation or research, the airline’s analysis and backed its request to kill the plan.

The pilots suspected that the airline was exaggerating the ill health of their pension to convince the court to let it pull the plug. Why the pilots’ plan, they wondered, and not the flight attendants’ plan or the mechanics’ plan? Had the airline deliberately starved their pension plan while funding the others? There was no way to tell, because the company didn’t turn over pension filings that included the critical liability and asset figures—not until the night before the bankruptcy hearing that would decide the pension’s fate. Without the information, the pilots couldn’t make their case that the liabilities were inflated.

In court, US Airways’ team of lawyers and consultants presented reams of actuarial calculations and colorful charts and tables demonstrating the pension plan’s deficit and the perils of preserving it. The frustrated pilots, with their lone actuary, couldn’t put on as good a show. The bankruptcy judge relied on US Airways’ figures and allowed the termination to proceed. In his decision, Judge Stephen Mitchell said that the pilots were less credible, because they had “based their calculation on rules of thumb and rough estimates while [US Airways’] actuary based his on the actual computer model used for administration of the plan.”

Bankruptcy raids like this are made possible by a loophole in the bankruptcy code, which coincidentally was enacted at about the same time as federal pension law, in the late 1970s. The law says that when companies go into Chapter 11, banks and creditors take priority over employees and retirees, who have to get in line with the other unsecured creditors, like the suppliers of peanuts and cocktail napkins.

Delta Air Lines filed for bankruptcy in 2005 and terminated the pension plan covering 5,500 pilots. Denis Waldron, a retired pilot from Waleska, Georgia, had been receiving a monthly pension of $1,939 until the pension plan was taken over by the Pension Benefit Guaranty Corp. But the PBGC guarantees only a certain amount. The maximum in 2011: $54,000 a year ($4,500 a month) for retirees who begin taking their pensions at sixty-five. The maximum is lower at younger ages, and for those with spouses as beneficiaries. The PBGC doesn’t guarantee early-retirement subsides, which are enhancements that make pensions more valuable. The payout is further limited for the pilots because they are required to retire at age sixty. After myriad calculations, including various look-back penalties, Waldron’s pension fell to just $95 a month.

Pilots were slammed in another way as well: Their supplemental pensions weren’t guaranteed at all. Don Tibbs, of Gainesville, Georgia, had put in more than thirty years as a pilot and was receiving $7,000 a month from his supplemental pilots’ plan and $1,197 a month from the regular pension plan. The supplemental plan was canceled when the airline filed for bankruptcy, and a year later, when Delta turned the pilots’ pension plan over to the PBGC, Tibbs lost that pension, too, thanks to quirks in the insurer’s rules.

Though creditors, shareholders, and executives all profited, Tibbs now has only his Social Security and a small military reserve income. “They were able to use the bankruptcy court to walk away from their obligation,” Tibbs recalled bitterly. “What happened to me and a lot of my friends was and is criminal.”

United Airlines was next in line on the bankruptcy tarmac, and it spread the pain even more widely. In 2006

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