Pension Perils - What you
may not know about an American Icon
By Karen S. Lynch
In Barack ObamaÕs recently released book, ÒThe
Audacity of HopeÓ (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, ÒLike 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.Ó 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.
GalesburgÕs Congressman Lane Evans (D-Ill. 17) had
expressed concern following MaytagÕs first announcement about its fledgling
manufacturing operation in Mexico: ÒIf Maytag CorporationÕs 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.Ó
The local manufacturing plant saw its employment
levels peak at over 4,000 in 1973 under Rockwell InternationalÕs 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 MaytagÕs
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, ÒMaytag announced a second plant in Mexico would
be built to assemble parts for its appliances.É 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. ÔThe announcement does not affect the Galesburg plant,Õ Powell said.Ó
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, ÔThe timing of the layoff
announcement, along with this monthÕs announcement of a second subassembly
plant in Mexico, have fueled speculation among employees that Maytag is
shifting assembly to Mexico.Ó According to the article, ÒThe 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.Ó
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, MaytagÕs
management approached the employees eligible to retire with an offer to
ÒgrandfatherÓ the previous contractÕs 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 MaytagÕs offer would also not be eligible for TAA
(Trade Assistance Act) benefits for retraining education. These employees made
substantial concessions in return for ÒguaranteedÓ better health insurance
coverage.
Except for the employees affected by MaytagÕs 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 contractÕs severance clause to match that of
the IAM&AW plant union — one weekÕs 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. MaytagÕs 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 Òthirty and outÓ 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: ÒOur extensive pension and [post-employment] obligations to retirees
are a competitive disadvantage for us.Ó
The article continued by pointing out that there was a
ÒtwistÓ to the pensions at GM: ÒThe 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.Ó 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 companiesÕ 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
governmentÕs 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 Òreserved capitalÓ 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 Òdrag down
earningsÉ because they arenÕt funded with dedicated assets.Ó 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 executiveÕs 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. ÒThese liabilities are largely hidden, because corporations
donÕt distinguish them from overall pension obligations in their federal financial
filings,Ó 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, ÒÉwill retire on $5.1 million a year, according to the calculations
of a watchdog group.Ó McGuire, forced to step down over compensation practices
Òafter a company-sponsored investigation determined many of the companyÕs stock
options were back-dated to make them more favorable for the recipients,
including McGuire.Ó 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 McGuireÕs
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 ÒfreezeÓ 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. ÒThe CEO joins the company in June 2001, proceeds to
destroy two-thirds of the companyÕs 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 MaytagÕs CEO Ralph Hake. By driving the company
into the ground, Maytag became an easy takeover target, triggering Mr. HakeÕs
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.Ó