U.S. Challenges Pension Switching : Retirement: Labor Department sues two California companies that it claims improperly replaced plans with Executive Life annuities. Worker restitution is sought.

In an action that could affect millions of workers nationwide, the Labor Department on Wednesday sued two California companies for allegedly improperly replacing employee pension plans with annuities sold by Executive Life Insurance Co.

The suits, which mark the first time the government has challenged employers’ actions in picking insurance companies, seeks to force the firms to make up any losses the workers may suffer because of the April 11 collapse of Executive Life.

The two suits were filed in separate federal district courts against Maxxam Inc. and its subsidiary, Pacific Lumber, of Scotia, and MagneTek, a Los Angeles-based manufacturer of heavy electrical equipment. Top executives of the firms were also named as defendants.

The Labor Department also sent “demand” letters to several unidentified firms, insisting that they provide guarantees to workers of full retirement benefits. These firms rely on annuities from insurance companies that have not yet fallen into trouble. But the Labor Department fears that some of these insurance carriers could fail, and is encouraging the companies to move retirement funds to top-rated insurers.

“We want to put the greatest possible pressure on businesses involved and the insurance industry to see that retirees get their benefits,” said David G. Ball, assistant secretary of labor. “They have to live up to their obligations.”

The state Insurance Department seized Executive Life--in the largest failure of a life insurer--two months ago after the company was crippled by junk-bond losses. Since then, the state has reduced monthly payments to retirees by 30% to conserve the insurer’s assets.

Although Executive Life’s failure has drawn federal attention and resulted in several hearings on Capitol Hill, Wednesday’s actions marked the first intervention by a federal agency in the complex issues stirred up by Executive Life’s failure.

While the suits directly affect only about 6,000 individuals covered by Executive Life annuities, Ball said the litigation could affect 3 million to 4 million others who depend on similar insurance policies for their pensions.

The companies of these workers and retirees terminated pension plans in the 1980s and used the surplus cash for other purposes. The firms typically replaced the pension plans with higher-paying annuities, policies from insurance firms providing for monthly payment of retirement benefits. Now some of the sellers of the annuities are having financial problems.

Employers have argued that they could not be blamed for the problems of Executive Life, which had a high rating and a good reputation when it sold the policies. The federal Pension Benefit Guaranty Corp., which protects pensions, said its coverage officially ended as soon as businesses replaced the pension programs with insurance annuities.

The Labor Department has been considering more than 300 referrals from the guaranty corporation, asking whether employers acted properly in their selection of an insurance firm to provide pension payments. But the department publicly was taking a hands-off position.

The situation changed radically on Wednesday, with the Labor Department declaring that employers are responsible for paying the pension benefits if the insurance company falters.

“We’re asking for restitution,” said Ball, who heads the Pension and Welfare Benefits Administration. “The action we’re taking is not directed only at Executive Life. We want to send a signal to business and the insurance community.”

The Labor Department alleges in the suits that the companies violated the Employee Retirement Income Security Act “by improperly selecting and purchasing group annuity contracts to fund pension benefits” for their retirees.

In the Maxxam case, it acquired Pacific Lumber in 1986 in a leveraged buyout, a transaction in which a buyer uses large amounts of debt which typically is paid off by using cash flow from operations or selling assets. Maxxam terminated Pacific Lumber’s pension plan to recover $62 million in overfunded assets, which it used to help pay for the acquisition.

Maxxam then chose Executive Life to provide retirement annuities “despite negative findings by a recognized insurance expert as to the insurer’s claims-paying abilities,” the Labor Department said. The suit names the two companies and several Maxxam executives, including Chairman and Chief Executive Charles W. Hurwitz.

“It’s our view the suit is without merit,” a Maxxam spokesman said Wednesday. “We can only conclude it was filed in response to political pressure, not on the basis of facts. We find it ironic that the government has singled us out when we are one of only a handful of companies that have already made our annuitants whole.”

The Houston-based company, which has interests in timber, aluminum and real estate, agreed to make up the 30% reduction in annuity payments to Pacific Lumber retirees.

However, there are an estimated 1,000 or more retirees from other firms once owned by Pacific Lumber and covered by Executive Life annuities. These retirees have had their pensions cut by 30%, and are not being compensated. Maxxam has said its responsibility ended when these subsidiaries were sold.

In the other case, MagneTek was formed in a 1984 leveraged buy-out partially financed by junk bonds bought by Executive Life. MagneTek transferred more than $23 million in pension plan assets to buy annuities from Executive Life, the Labor Department said.

Because Executive Life owned 10% of MagneTek, this transaction was prohibited by federal law, the suit said. In addition, the MagneTek directors and some of its executives, who were also named as defendants, violated their responsibilities because they “failed to adequately evaluate the financial stability” of Executive Life, the Labor Department said.

Robert Murray, a MagneTek vice president, declined comment on the suit, saying the company had not seen the allegations. He said the company has been making up the difference between the regular pension and the 70% authorized by the state of California, Murray said. The annuities cover 600 retirees who had worked at a MagneTek plant in Milwaukee.

Sen. Howard Metzenbaum (D-Ohio), who has held hearings on the Executive Life issue, commended the Labor Department for filing its lawsuits.

“I just hope this action is not too little too late,” Metzenbaum said. “For eight years the Labor Department failed to act to protect workers and retirees when takeover artists terminated healthy pension plans and grabbed $20 billion from these plans for their corporate adventures.”

The Labor Department suits also may encourage a proliferation of private legal actions. Even before the government acted, at least two class action suits had been filed against MagneTek and Blue Cross of California.

These suits argue that companies should have known better than to invest in Executive Life annuities. By investing in these contracts, the suits say, the company managers and pension administrators breached their duties to plan participants, and are therefore liable for damages.

The companies disagree, noting that until relatively recently Executive Life still scored high marks with a number of industry rating firms. Plan operators were considering the best interests of pensioners when they invested in what they thought were among the safest and highest-yielding investments around, the companies have said.

Executives at companies ranging from Unisys to Pacific Lumber to Holiday Inns and Honeywell report a tremendous increase in inquiries about the pensions. And many callers are hostile.

“Whenever anybody loses money, they are going to feel as if they have been wronged,” said Robert Evans, assistant treasurer of Xerox Corp. and a spokesman for a group of pension plan fiduciaries caught up in the Executive Life debacle.

Times staff writers Kathy M. Kristof in Los Angeles and James Risen in Washington contributed to this story.