Pension Perils - What you may not know about an American Icon
By Karen S. Lynch
In Barack Obama’s recently released book, “The Audacity of Hope” (Crown Publishers, New York) the Senator from Illinois said he spoke to Maytag Union Leaders about the October 11, 2002 announced closure of the Galesburg Maytag Refrigeration plant. Obama was not pleased that another 1,600 employees would have their jobs shifted primarily to Reynosa, Mexico. Obama wrote, “Like towns all across central and western Illinois, Galesburg had been pounded by the shift of manufacturing overseas. In the previous few years, the town had lost industrial parts makers and a rubber-hose manufacturer; it was now in the process of seeing Butler Manufacturing, a steelmaker recently bought by Australians, shutter its doors.” An average Maytag worker in Reynosa on the night shift, with nine months on the job, earns about $1.07 an hour during a 42-hour workweek, according to an article in Comite Fronterizo De Obrer.
Galesburg’s Congressman Lane Evans (D-Ill. 17) had expressed concern following Maytag’s first announcement about its fledgling manufacturing operation in Mexico: “If Maytag Corporation’s announcement last month about its small manufacturing operation in Mexico follows the familiar pattern, its refrigerator manufacturing operation in Galesburg could be gone or drastically reduced in 10 or 15 years, perhaps less.”
The local manufacturing plant saw its employment levels peak at over 4,000 in 1973 under Rockwell International’s ownership. The refrigeration plant, sold by Rockwell in 1979 to Magic Chef, had seen employment levels systematically reduced concurrent with improvements in technology and elimination of employees as cost-saving measures. The employment reductions continued after Magic Chef merged with Maytag in 1986. The Maytag plant had a workforce of about 2,700 workers with an annual payroll of $70 million at the Galesburg facility in 1990. Maytag invested $50 million to upgrade their Galesburg operations in 1988. A second investment of an additional $180 million in 1994 was made to bring the plant up to Department of Energy requirements for energy efficiency standards. In early 2001, Maytag employed around 2,400 people in Galesburg but had reduced that number by the summer of 2001 to around 1,600 production workers. That followed Maytag’s purchase of Amana and the resulting laying off or shifting the jobs of 800 employees.
Tom Nelson of The Galesburg Register-Mail wrote in an article on July 11, 2002 that, “Maytag announced a second plant in Mexico would be built to assemble parts for its appliances.… Jim Powell, a spokesman for Maytag, said the plant will initially do subassembly work on the transmissions for washing machines. The work is expected to be shifted to Mexico gradually, he said. ‘The announcement does not affect the Galesburg plant,’ Powell said.”
Maytag announced in July of 2002 a layoff of 300 second shift employees on the top-mount line. Nelson wrote another article in the Register-Mail on July 23, 2002 stating, ‘The timing of the layoff announcement, along with this month’s announcement of a second subassembly plant in Mexico, have fueled speculation among employees that Maytag is shifting assembly to Mexico.” According to the article, “The two events are not linked, Powell repeated today. The company has no plans to shift final assembly of any of its major appliance lines to Mexico, CEO Ralph Hake stressed last week in a presentation to Wall Street analysts.”
Less than three months later, on October 11, 2002 Maytag officials announced that the Galesburg plant would close within two years or less. Despite continued reassurances by Maytag officials, the employees and the public had no reason to believe Maytag's decision to close had just been made the day before as they claimed. It was obvious this decision was in the works for nearly two years.
After the announced Galesburg plant closure, Maytag’s management approached the employees eligible to retire with an offer to “grandfather” the previous contract’s insurance if they would retire by the end of the year. In exchange for retiring two years before the scheduled closure, employees accepting the insurance offer would give up their rights to any severance pay, yet-to-be negotiated with the International Association of Machinists and Aerospace Workers (IAM&AW) plant union. The recently negotiated contract with the Office and Professional Employees International Union had just negotiated up to six weeks of severance pay in a new contract. The early retirees accepting Maytag’s offer would also not be eligible for TAA (Trade Assistance Act) benefits for retraining education. These employees made substantial concessions in return for “guaranteed” better health insurance coverage.
Except for the employees affected by Maytag’s early retirement offer, the press was largely unaware of the offer Maytag made to employees to retire before the plant closed in 2004. The employment level was nearly 1,800 at the time of the closure announcement on October 11, 2002. Later that month, Maytag said they could not tell employees a definite cost of the new insurance premiums but numbers upwards of $300 per month were a possibility. The new insurance also had higher deductibles and new co-pays. Also lost in the newly bargained contracts was the prescription drug card, replaced by a 90-day mail order plan at greatly increased cost for name brand drugs, 20 percent of the cost or a $100 dollar minimum for a 90-day supply.
Almost 200 of the most senior employees accepted the early retirement offer leaving at the end of December of 2002. In 2003, the office union re-negotiated the new contract’s severance clause to match that of the IAM&AW plant union — one week’s pay for each year of service, up to six months, instead of the six weeks the office union had in their new contract. Just a few weeks after the two union contracts had expired in 2005, Maytag announced, beginning in January of 2006, that all retirees will be under the new insurance plan, including those offered the early insurance grandfather retirement in 2002.
The 2002 early severance retirees exchanged their seniority bumping rights to work until the plant closed, their severance pay, and TAA benefits after the closure announcement in exchange for a grandfathered insurance package that was eliminated by company fiat. The change in insurance costs and coverage also affected all other retirees who had retired under previously bargained contracts or early severance agreements, leaving some with no insurance at all because they were over age 65. There were groups of employees who had retired with lifetime insurance, some as high as a 95/5 percent coverage rate.
Language did exist in the insurance booklets that allowed the company the right to change insurance coverage at any time, including for retirees. However, those who asked if the agreement to retire early in 2002 for the better insurance plan could be changed, the employees were orally told the early retirement agreement would not change. The retirement papers employees received in 2002 also included the terms of the retirement insurance, stating it would last until age 65 when insurance coverage expired.
The language the company cited as justification for the change actually expired at the same time as the contract. The employees had made significant concessions over several years. The city of Galesburg and the state of Illinois gave millions of dollars in tax and other incentives over several years to keep the jobs in Galesburg, including incentives dating to 1995 that totaled $9,715,000 with Enterprise Zone abatements continuing until 2004.
After working for a company for many years, those with company paid pension plans are eager to draw those hard-earned benefits once they retire. However, will those benefits be available then? And how long will they be continued?
Many pension plans are under-funded while a growing number of employees will be drawing against those funds as the baby boomers begin to retire. Maytag’s nine-month financial report, ending October 1, 2005, filed with the SEC showed a pension under-funding of over $500 million. Maytag did make a contribution of $51.9 million in pension contributions with no plans to make further contributions the remainder of the 2005 year.
Pension under-funding is not just a Maytag problem. With the buyout, it now becomes a Whirlpool liability and it exists in many large corporations. When workers first negotiated “thirty and out” plans, workers could retire with 30 years of service, regardless of age, but life expectancy was around 60-65 years old. Like Social Security, the increase in life expectancy has put a huge strain on systems that did not expect to pay benefits for such an extended time and have frequently been underfunded.
This year General Motors announced reducing pension plans for 42,000 salaried workers, shifting to a defined contribution plan, known as 401K plans, as a cost cutting-measure. A June 23, 2006 Wall Street Journal article by Ellen E. Schultz and Theo Francis quoted a General Motors spokesman: “Our extensive pension and [post-employment] obligations to retirees are a competitive disadvantage for us.”
The article continued by pointing out that there was a “twist” to the pensions at GM: “The pension plans for its rank-and-file U.S. workers are overstuffed with cash, containing about $9 billion more than is needed to meet their obligations for years to come.” The executive liability for pensions at GM is $1.4 billion, according to the article. A General Motors balance sheet showed their total pension liability at the end of 2005 was $10.92 billion.
It is difficult to get at the true figures on confusing financial reports, only relying the companies’ own SEC filings. That is one reason behind the Pension Protection Act of 2006, signed Aug. 17, 2006, to better define pension-funding requirements. Critics of the act claim it is more of an accounting rules change than an assurance of full pension funding, although the bill says there is a 100 percent pension funding requirement within seven years, with a longer time given to airlines. The bill also encourages automatic enrollment in 401K plans.
There is a caveat in the new bill with a waiver for plan sponsors in financial hardship to request permission from the IRS to forgo making all or a portion of a required contribution. If a waiver is granted for a plan year, it must be amortized in level annual installments over five years. Critical hardship plans have up to 15 years to bring pensions up to full funding. It is unclear what will happen to companies that file for bankruptcy protection under the new act that would prevent the requirement of the government’s Pension Benefit Guaranty Corp. from having to bail out pension plans that go broke.
Pension funding is a difficult issue to understand for non-financial individuals. Many employees believe their pensions are real money in a bank account. Actually, the pension fund obligations are merely a number on a balance sheet showing “reserved capital” needed to fund projected pension obligations. In other words, a portion of the value of the company set aside for future pension obligations.
Other statistics revealed by the Wall Street Journal authors showed that executive pensions are surging, just as their compensation continues to rise. The pension obligations for General Electric, reported to be $3.5 billion, AT&T Inc. $1.8 billion, Exxon Mobil Corp. and IBM each about $1.3 billion. The Wall Street Journal said Executive pension costs “drag down earnings… because they aren’t funded with dedicated assets.” Further exasperating this problem is that executives are often paid 60 to 100 percent of their compensation while lower-level workers typically receive from 20 to 35 percent of their pay in pension benefits. A single executive’s pension sometimes approaches $100 million per year.
David Dorman, the CEO at AT&T, retired after the merger with SBC Communications in January with a yearly pension of $2.1 million. That replaces 60 percent of his annual salary and bonus, after only five years of employment with the company.
While American corporations cite high pension costs as one reason to move production or cut pension plans, executive pensions remain largely intact. “These liabilities are largely hidden, because corporations don’t distinguish them from overall pension obligations in their federal financial filings,” according to the Wall Street Journal writers.
A similar situation exists with insurance coverage with cost to workers and retirees rising, despite previous retirees having costs frozen at the level of the contract in effect when they retired. Many companies are now passing higher insurance cost and reduced coverage on to their employees and retirees — or they are cutting off benefits altogether.
According to a recent Associated Press article, CEO William McGuire of United Health, an insurance provider for Maytag and Whirlpool, “…will retire on $5.1 million a year, according to the calculations of a watchdog group.” McGuire, forced to step down over compensation practices “after a company-sponsored investigation determined many of the company’s stock options were back-dated to make them more favorable for the recipients, including McGuire.” The article also stated McGuire will receive a severance benefit of $6.5 million lump sum and he has stock options that were worth $1.78 billion as of the end of 2005. The Wall Street Journal reported McGuire’s benefits would create a liability of about $90 million.
According to the Wall Street Journal article, some employers have actually added or enhanced pension plans for executives while simultaneously eliminating plans for their other employees. Companies are increasingly pushing 401K plans to replace traditional pension plans. Maytag offered 401K plans in 1989, forcing employees who wanted to participate in the plans to “freeze” their company-paid pension at the current contract level.
Ralph Hake, CEO of Maytag at the time of the acquisition by Whirlpool, saw a lucrative severance clause for nearly destroying an American icon. According to Fred Whittlesey, compensation expert of Venture Group, Inc. “The CEO joins the company in June 2001, proceeds to destroy two-thirds of the company’s market value over the next four years — costing the shareholders $1.6 billion. In return, he gets compensation of $9.4 million by having the company taken over by Whirlpool Corp. This describes the situation with Maytag’s CEO Ralph Hake. By driving the company into the ground, Maytag became an easy takeover target, triggering Mr. Hake’s golden parachute estimated to be worth as much as $19 million. This, of course, was on top of his multi-million dollar annual pay package.”