Don’t Legitimize Pension-Fund Raids : Crash Showed Folly of Letting Firms Remove ‘Surplus’

In light of Black Monday, Congress should promptly pull in the reins on pension-plan “raiding” proposals now racing toward passage as part of the budget reconciliation package.

Workers and retirees have been contending all along that it is shortsighted and contrary to their interests to allow companies to take so-called “surplus” money out of pension plans. The stock market collapse proved them right. Policy-makers should heed their warnings and rethink proposals that sanction corporate raids on pension plans.

The raiding of pension plans is a back-handed way for companies to get access to workers’ and retirees’ pension money that otherwise would be off-limits to them. This type of raiding began in 1980 when foreign investors got wise to a loophole in the federal private pension law that allowed them to finance the takeover of A & P with pension money. All they had to do was cancel the plan and pay workers and retirees their benefits that had been frozen at the time of termination. Then they were free to scoop up any money over that amount--misdefined as the “surplus.”

In 1984 the Reagan Administration made it even easier to get at pension-plan money. It issued guidelines allowing companies to siphon the surplus from ongoing plans using “sham” terminations, a technical maneuver to restart or continue a plan at a bare-bones funding level. This opened a Pandora’s box and encouraged even more firms to pull out money. At last count, more than 1,400 companies have drained $17 billion of so-called “surplus assets” out of conventional pension plans to finance takeovers, leveraged buyouts and other short-term ventures.

But the stock market collapse proved the surpluses to be all “smoke and mirrors.” Overnight, hundreds of so-called “overfunded” plans lost billions of dollars--many saw their surpluses disappear completely.

The pending proposals to legitimize the raiding of these plans were developed before the crash and tucked quietly into the budget bill at the urging of business groups and the Administration. These proposals remove the moral taint from a practice now steeped in controversy. Once Congress condones the practice, even “good guy” employers will have to raid their plans at the demand of stockholders and creditors.

The House has already rubber-stamped these proposals. The Senate was slated to act before the market plunged. Thanks to extended negotiations on the budget deficit, lawmakers now have time to strengthen the proposals.

In a nutshell, the proposals still allow companies to take money out of pension plans. Instead of letting employers get access to all of the “surplus,” they improve on the Administration’s guidelines by requiring that some of the money stay in ongoing plans. This “cushion” is intended to protect against possible downturns in the market. But the amount is inadequate to protect workers and retirees.

“The stock market dive shows how foolhardy it is to allow any money to leave pension funds,” says Michael S. Gordon, a pension-policy expert who helped write the federal private-pension law. “Congress showed a lot of wisdom back in 1974 when it required that all money stay in plans to hedge against ups and down, and be used exclusively for the benefit of workers and retirees.”

If companies are allowed to draw down to the cushion, and market conditions should worsen, there will not be enough money in the fund to pay workers the future benefits they are counting on getting. In a worst-case scenario, companies that cannot make up the cash will be forced to stop the plan and freeze workers’ benefits midstream, leaving these employees with the prospect of having worthless pensions.

Workers won’t be the only losers if the proposals go through. Millions of retirees will be doomed to a lifetime of inadequate benefits. Private pension plans are not indexed to inflation, but in the past many retirees got occasional voluntary adjustments. Where surpluses have vanished so have these adjustments. Retirees contend that surpluses should be used to restore the value of their pensions decimated by inflation.

If every dark cloud has a silver lining, perhaps Black Monday’s is that it revealed that pension-plan surpluses were nothing but a mirage. Now Congress has the chance to do the right thing. The preferable and most protective solution would be for Congress to again bar companies from taking any money out of funds. If this is not politically feasible, then the cushion should be expanded to better protect against future Black Mondays and to reflect the need for adjustments to retirees.

To prevent companies from canceling their plans just so they can get at the “surplus,” Congress should require pay-outs to workers and retirees that reflect the real benefit expectations that would be lost with the plan.

Companies argue if they cannot get easy access to “surplus” assets, they will underfund their plans or dump them completely. This is nonsense. It is unlawful to deliberately underfund pension plans, and companies won’t drop their plans because they need them to attract and keep top employees.

Pension raiders are only interested in quarterly profits. Pension plans are here for the long haul to provide economic security to workers and retirees. Congress should put short-term politics aside to reexamine the long-range policy implications of its decisions.