Pension Funds: Who's minding the store?

Underfunded Pension Funds - Who's minding the store?

Within the last month, facts regarding pensions were released by Standard and Poor's and Congress this week changed the rules. Standard and Poor's reported that pension underfunding deepened in 2003. Although pension fund assests of the SP500 companies increased to $1,063 billion from 2002's $951 billion, they still are below the projected value of $1,323 billion. Presently, the current level is still below 2001 peak level of funding of $1,089 billion. For more details visit Standard and Poor's website.

This Week the Senate passed legislation to address this problem and of course employees were given a "back seat". They lost an estimated $15 billion in total assets due to a new method of calculating pension assets. However, considering that employees are currently missing $260 billion, the loss created by the new method of calculation pension assets reduces the current deficit incurred by companies to $245 billion. So who really wins?

But, oops, if that weren't enough, the airline industry and the steel industry were given special treatment because they are seriously underfunded. The airline industry claims that each company will save $600 million per year. Or do you think employees lost $600 million?

What this means to employees of these companies is that if these companies fail, these employees lose "big" because Corporate America will have once again taken money that doesn't belong to them and found a way not to repay it. Congress will tell you that the new bill will help these industries so that they don't fail and therefore are protecting the employees investment in these companies (their pension). And it appears that the employees stand a better chance of recaturing some of the pension by keeping these companies vaiable. But one should ask, why isn't it a policy of this country to fine or penalize companies for using employee funds?

The answer is because it's complicated. This is a delicate issue because pension funding is predicated on the theory of growth and prosperity. The future growth and prosperity of the company is paramount to employees receiving their fair share. This theory implies that the company will earn more in the future which will enable it to cover its future obligations The next assumption that the theory uses is that the attrition rate is slow and steady. Not all employees will retire simultaneously. This assumption, in a normally profitable company, is a reasonable assumption to make and therefore a company only needs to keep a portion of their total obligation in the pension fund to cover those employees that are retiring and have retired in the past.

So in summary, these rules that apply are all well and good when the dynamics of the company are favorable. The company grows, the employees get their pension, and the company gets to efficiently manage the opportunity cost of capital. The translation of this is that if the employees pension is worth $200 million, they should get $200 million. But as employees know they don't see that money in their bank account, they see it in a statement, which really is a promissory note from the company to pay them that amount in a future. Wherein lies an assumption, or loophole. This pool of money is then considered an asset of the company rather than an asset to the employee. Well, like all assets, management is always figuring out how it can make more money from its assets, so pension funds are a huge wasting asset to them; if you're management. If your an employee, it's your money.

What has happened is that the employees pension money has been used as collateral for the purposes of securing loans and other purposes. This is America. You can't just keep money in the bank and not use it. So the employees pensions funds may have been temporarily used to pay expenses during periods when the company experiences a negative cash flow. Now these events are under the radar of employees and law enforcement because when business picks up most companies restore and rectify the situation and the employees pension fund becomes unemcumbered. But unfortunately their are some executives who see employee pensions as their money and have taken steps to abuse their position to craft strategies to secretly steal this idle pool of money that is just sitting in the bank, which is the employees' money, by steadily mismanaging the company.

Mismanagement can take many forms from ignorance to malfeasance. But in the majority of cases, mismanagement takes the form of an insidious chronic disease. This occurs when management keeps making costly mistakes, when expenses are too high, or management gets overpaid whether in salary or by other means such as bonuses, perks, company privileges, stock options, jets, etc. The difference in these cases is that these executives know what they're doing and have already planned how they can waste away their employees funds.

But when the company isn't growing nor is it able to make money, that's when the employees' pension funds remain encumbered and the employees discover the tradgedy. The charade though is that the company calls upon the employees to "suck it up" and give more; so that they can save the company. Management delivers the "All for one, and one for all" speech to its employees and claims that both management and employees are in it together, because they have a vested interest in saving the company. But in reality, management has made bad decisions, whether intentional or not, that will cost the employees their retirement, and management is counting on the emotional attachment and commitment that employees have made to the company to accept the new terms of employment. After all, they're fighting to save their pension money after they chose to work for this company their entire life. But by staying there and bailing out management, the employees are unwittingly giving management another chance to rob them of what is rightfully theirs, and that's a pay increase and other benefits which will now be forfeited all for the sake of saving their retirement funds. Management wins because they have lowered their cost of labor by recinding pay hikes and decreasing benefits, and they are free to start the next cycle. And the cycle continues, because management isn't ousted and law enforcement doesn't step in. Until these practices are exposed, those committing such offenses remain in control of the company and continue their pattern of mismanagement, or plan to divert employees potential wealth to themselves.

Chysler is a classic example of this. While Lee Iacocca was heralded as a shining example of how corporate executives should behave, the employees had to have asked themselves why was their company making such ugly and mechanically inferior automobiles? The answer was that the company was mismanaged. Major mistakes were made, and the employees paid for it.

It was so bad that the government was the only investor willing to take a chance on Chrysler. Hundreds of thousands of employees jobs were on the line. But think about the time leading up to the disaster. Chrysler was a dying company and the executives were bleeding it dry while the employees were perhaps clueless, but certainly powerless to do anything.

This practice still occurs but in a free market economy its all about taking what you can. And if you can take it, it's yours. The problem is that we think we have evolved to become more compassionate and that the rules of the game, the law of the land, protects its people and workers from these dastardly tactics. But in truth they don't, and so it goes. These practices have been in existence for a century so how can this be remedied.

The problem occurred because corporate executives weren't held responsible in the context of being penalized. They were fired like any other employee, but that wasn't a penalty. What difference is it to those offenders if they walk away and get to the keep the millions that they acquired along the way. Where's the penalty? The fact that they lost their job and can't unscrupulously rob employees of any more money isn' t a penalty.

Now if government would change the rules so that the Corporate executives would have to pay back everything that they took, now there's a penalty. But collecting money is always the issue; as is assigning blame. However, if this glitch is avoided for a moment, recinding their pay would be a penalty. You would now have a system whereby executives would not to be tempted to rob employees.

Of course the next scenario would then be for the company to collect actual funds from the offender so that would bring about another set of rules to protect employees. The point here is that our government can impose rules of decency and fairness on businesses that don't legislate an increase in expenses to the company. Congress just needs to hold the company's executives to a higher standard when they employ workers. Congress just needs to make it clear the that their is a penalty for making mistakes of any kind because it isn't fair to employees that executives are free from liability when their poor decisions cost them money. And to say that corporate executives are encouraged to make good decisions because they will be rewarded by higher stock prices is naive and ignorant of human nature.

The fact that another group of Americans, investors, lost money because of these poor decisions is all the more reason that Congress should act. Of course as a consequence, the stock price fell which affected shareholder values, and those bad decisions were transferred to investors who bore the brunt of their intransgressions, but they invested in the company willing to take that risk. Employees don't. Employees work to maintain a standard of living and they shouldn't be subjected to the same risks as shareholders. And they aren't since they still get a pay check, but they risking future pay increases and their pension when costly mistakes are made. (Congress needs to address this concern.) Although it can be stated that they are considered shareholders to a certain extent, we all can admit that employees work so that they can receive a paycheck; so that they can experience life in any way they see fit. They don't work to assume any other risk and the company shouldn't transfer any risk to their employees. Congress needs to let it be known that they are protecting employees and their standard of living. Because if they don't more Americans will be unemployed and they won't have anyone to tax.

If the company's board is held accountable for any loss in employee benefits then the rule would be a simple one. People can make honest mistakes but unfortunately, Congress wouldn't be entitled to legislate the difference between these acts. So by making a rule that prohibits tampering with employee wealth is a simple solution to quantify and enforce corporate liability. But the problem of course is in assigning blame. We can all imagine how an innocent member of the board would become the sacrificial lamb for the malevolent deeds of others. Just think about it, if someone were devious enough to bilk employees then they would certainly be able to disguise their culpability. But, the path is clear to put pressure on executives to be held accountable. Then the dismissed executive wouldn't be as valuable in the marketplace and he/she wouldn't be able to take their conniving strategies to another company. These executives would become outcast misfits of the corporate world, and become displaced down the corporate ladder. They would be penalized not by incarceration but by their personal loss of wealth and shame. They would be forced to become an employee and learn how to respect the efforts of those around him/her and discover the same pain that he/she had inflicted on others.

The problem is that the law drags its feet in these cases and let's company's play the game. The most notable example is Enron, but Tyco and Sunbeam are right there to supply other examples of how this happens.

The fact is Congress has still avoided the essential question of protecting employees' pensions. However, if one were to examine the issues here then you would have to acknowledge that Congress has an interest in promoting business so that it's easy to start a new business. The balance is a delicate one because while it is important to encourage new business Congress must avoid creating too many legislations. The primary goal is to allow companies to form and make money so that its citizenry may be gainfully employed. Second, pension funds aren't a right of the employee and as such companies create them as an incentive to stay with the company. Just think about how hard it would be for the company to advance themselves if employee turnover were 100%. The company would be bogged down with the process of hiring new employees constantly and it would be wasting its time and money performing this function. And in the process, it would be wasting its profits on hiring, and eventually no new products would emerge to advance the growth of the company. So pensions were created to strengthen employees committment to the company. Pensions entice employees to stay.

But along the way, management got involved in managing the employees pension money and it gained more legislative power to access this pool of money for its own needs. Presently, the examples cited demonstrate that corporate executives are now inclined to scheme methods to rob employees of their life's commitment to that company. The problem displayed thus far is in assigning blame and culpability, besides the obvious that it is illegal and that employees are left penniless. This cynical portrayal of Corporate America has the unfortunate consequence of demoralizing Americans. And if this dark mood permeates from Wall Street to Main Street, it will be irrelevant when Congress counters with protectionist policies, which on the surface are an attempt to restore worker confidence by forcing companies to keep jobs in the USA. Americans will by that time have divorced themselves from any attachment to a company and will no longer trust employers. They will adopt a "catchers catch can" mentality which will result in employees constantly changing jobs looking for the best opportunity. They will not hesitate to move on when the opportunity arises. Company loyalty will suffer, which will affect productivity, product quality, and increase the cost of labor through increased training costs. These expenses will all negatively effect the company's performance and their ability to compete.

This is a grim portrayal of Congress's failure to address the larger issues regarding pensions facing both employers and employees. But in the last two week, Washington has revealed its intentions. 1. The governement is broke, and they are now formulating a plan to allow employees to control how their social security is to be invested. 2. They changed the rules to the detriment of employees pension funding. How can this be good news when Wall Street just transferred $5 trillion from employees to corporate executives?

The last time Americans were told were given new ways to protect their wealth from the deletrious effects of taxation, Congress created the IRA. That legislation granted employees the ability to fund their retirement savings with after tax dollars for those without pensions and it was heralded as a huge benefit. Millions of Americans now had an incentive to save for their retirement. However, five years later Americans learned what it means to buy and hold for the future, Corporate America stock prices dropped 50% at their worst levels and investors were stuck with the losses. By funding their IRA's, employees forfeited their right to claim investment losses as a means to offset income taxes. That means you couldn't reduce your income taxes when before you could. Secondly, as this pool of money was invested for the long haul no harm will come to those who remain invested as the stock market always goes up - doesn't it? Just don't tell that to those who lost half of the retirement funds and who are now working again so that they can keep their home.

Essentially, those who didn't have a pension before were now given access to the same benefit as employees and it seemed fair and just. It was viewed as Congress had righted a wrong. Our dear politicians had remedied a glaring unfairness. The only problem was that Wall Street found a way to rob these unsuspecting employees of the wealth with the government's blessing. It's plain and simple. It's cynical, but simple. Wall Street did what corporate america has been doing for a hundred years. They just did it in 5.

Here again in 2004, employees are being given a new way to save for the future, but this time is involves Social Security. It would be great if this truly benefits employees and produces a method for Americans to increase their wealth, but if this is put into global context, then how much richer can Americans get off the back of every other human being outside of America? We already have one of the highest standards of living in the world and honestly, the other countries of the world want what we have and they're now competing against us for it and they out number us. So ask yourself, how long can we remain previleged to this status?

So when you put together the historical fact that employees have the odds against them to acquire wealth, it is hard to imagine the upside in the proposed change to Social Security. History has demonstrated that the corporate game of "hide and seek" has been going on for a hundred years off the backs of employees, and now the Government and Wall Street are trying to stay ahead of the game by crafting new schemes to delude employees into giving them their money, while they are preying on employees' hopes of creating future wealth that will never come to pass.

You've witnessed the drastic effect of IRA's and the loosening rules regarding taxation of inheritance and captial gains on homes. These were all for our benefit, but Wall Street found a way to transfer $5 Trillion of wealth in just 5 years! So what does that say about human nature now? What do you think those in power are doing to help you create and maintain your wealth?

Grim is the dark side young Luke Skywalker, and be mindful of the power of the force.