By on March 31, 2008

yourfile.JPGHuman Resource Executive Online points out that the new Detroit "easy-fix" of buying out workers with pension-fund money might not be the greatest strategy ever. Chrysler and GM have both recently offered worker buyout packages, with money from overfunded pension accounts. The strategy is attractive, as workers can defer taxes on pension fund payouts to their 401k accounts, and corporate can keep their cash position intact. But overfunded pension accounts never stay overfunded for long, and observers say that intense market volatility makes now a bad time to risk underfunded pension liabilities. "The [Chrysler] fund is probably overfunded because of the over-inflated value of the stock or securities that have been invested," says Gerald Myers, business professor at the University of Michigan and former chairman of American Motors. "Now that the stock market and the real estate market is [sic] going down, it's not unlikely [the pension fund] will be underfunded in short order." Meanwhile, labor relations consultant Bill Adams of Adams, Nash, Haskell & Sheridan believes that buyouts in general merely mask major workforce problems. "The automaker is stomping on the ants, and the bears are walking off with the picnic," says Adams. "They can't dump the relationship with the UAW [so] they're going out of business and delaying the inevitable." Man does that truth hurt sometimes.

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11 Comments on “The Dangers Of Pension Fund Dipping...”

  • avatar

    What I don’t understand is, how can the company be running their employees pension funds? I guess that this is a difference in cultures, as from where I come from, the state governs the pension funds of ALL people. The difference is, a company in desperate need of cash will ALWAYS see the pension funds as easy cash and equity, and the future retiree will NEVER be sure of a pension coming up in the future. It is simply too much of a temptation to resist. A company under-funding their pensions is in deep, deep trouble.

  • avatar

    Studebaker spent all the money from their UAW worker’s pension funds, then closed up shop. There was nothing anyone could do, and there was no taxpayer funded safety net.

    This did cause the laws in the United States to be altered to protect workers, and it took from 1964 to the early 1970’s to put these into place, but in the ensuing 35 or so years, many of these laws have been rolled back.

    Bad time to be a UAW auto worker (or ex-auto worker).

  • avatar

    To menno’s point, don’t we now have a FDIC-type of bailout program for pension funds that come up short? If so, every industry is playing fast and loose with money these days, and expecting the government to “Bear Stearns” them.

  • avatar

    In response to what happened to Studebaker workers – some of whom were left with nothing when the automaker closed up shop in South Bend, because it had been underfunding its pension plan for years – the federal government passed the Employee Retirement Income Security Act of 1974. It is popularly known as ERISA.

    ERISA requires a corporation that has a pension plan to fund it at minimum levels. It does not, however require a corporation to have a pension plan in the first place.

    Under ERISA, a pension up to a certain amount – I believe it is around $40,000 per year – is guaranteed by the Pension Benefit Guaranty Corporation. Health benefits, however, are not guaranteed. These benefits can be as important to retirees as the regular pension checks.

  • avatar


    In the US, companies can not legally loot their pension funds. They can terminate the pension. Most companies in the US no longer offer pensions anyhow. Instead, they offer 401ks.

    The pensions that are still out there are insured by the PBGC, which in turn is insured by the taxpayers.

    When a company goes bankrupt, like United did, the PGBC takes over the insured pension. If a company mismanages their pension, the PGBC can take it over. If a company fails to make contributions, or attempts to take money out, then the PGBC takes over.

    However, the PBGC is a mess right now. They have had to take over some huge pension failures such as United Airlines. The coverage offered by the PBGC is limited ($40k/year per). So most long term United Airlines employees got screwed out a large amount of their pension.

    Your concern that pensions are there to be looted by desperate companies is valid. It is possible, but difficult to do. Most pensions are managed separately. That is, funds are not commingled. The pension money is given to a trustee. Once a dollar is contributed to a pension, it is very difficult for a company to get that dollar back. More often than not, a pension is simply abandoned by the company.

    If a company officer or pension trustee is found to have failed in their pension responsibilities, under ERISA they are liable and even criminally liable for their actions.

    Also, in the US we have something that is very similar to what other counties call their “Old Age Pension”. We call ours Social Security. So when you reach an eligable age, you start getting monthly pension checks from the government. There are differences. The US system has very little means testing, which means you get benefits no matter how rich or poor you are.

    Most Americans would trust the government managing their pension even less than a company. Seriously, Congress would loot it before the sun went down. They would take the money and replace it with a bunch of IOUs that future tax payers are stuck honoring.

    So… even if you don’t save a dime, you are supposed get something from the social security retirement benefits. If you have a pension, it is insured up to a given amount.

  • avatar

    “To menno’s point, don’t we now have a FDIC-type of bailout program for pension funds that come up short? If so, every industry is playing fast and loose with money these days, and expecting the government to “Bear Stearns” them.”

    Sooner or later the government is also going to run out of money. They are in just as bad shape as the Big 2.8. Need a government death watch series.

  • avatar

    Why should the US take on the responsibility of honoring pension funds? It’s stupid. I promise you that I will pay you tomorrow for a hamburger today. If I don’t pay, you should be punished for your lack of diligence, not be asking your neighbors to bail you out.

    The nanny state is an evil no one can afford. This loophole where if both a union and a company lie to you, then you get paid anyway is total scam. No one is offering to pay me for the tens of thousands of dollars owed me over the past few years.

  • avatar

    Thanks, Yankinwaoz. I’ve always had trouble understanding the american pension system. In Sweden, there’s the government funded pension-plan for all people. It is based on how much money you have been paid, and how much money you have paid in taxes in return. It is a rolling system, which means no future funding, as the taxpayers of today pay for the retirees of today. The confidence to the system is high, as it has worked for 70 years. It is not enough, however, so there are savings-funded private pension-plans, which you pay for monhtly as time goes by. But they are bank controlled/insurance company controlled, and have nothing to do with where you get your paycheck from.

    And, no doubts about it, companies view company-controlled pension funds as liable assets. Which is especially frigthening concerning GM and Cerberus. An asset-stripping company like Cerberus view the pensions as their holy grail, I have no doubt about them wanting to loot that money, or in fact, actually planning to do so. Think about it, where will their money come from? Chrysler is run-down, there are no assets to speak of. Even a strip-and-flip is not enough. And GM has been underfunding their pensions in the billions, to such an extent that even the interest makes a heavy burden on the quarter reports.

    If it’s techincally possible, someone with big enough interest will ransack the place. It has been proved before, it will be proven again.

  • avatar

    The pension fund system is moronic. I don’t trust my employer to manage my retirement funds. GM hasn’t done such a great job with the car business…what makes people think their retirement planning is any better? It is just too much of a conflict of interest for GM to be holding the pot of money AND needing a pot of money to fix the business. In my opinion, pension funds should be held by third parties- such as trust banks- where nobody can strip them or steal from them.

  • avatar

    The method that companies use to “loot” pensions in the US is by tweaking the accounting rules used to project future earnings and liabilities.

    One popular method used in the 1980’s and 1990’s to fund corporate take overs was to return “excess” pension money to shareholders. For example, lets say Company A was run by a very conservative board. This board might assume a low returns of 4% for their pension money. So they would contribute enough to cover their conservative projections.

    Takeover man B would come along and say “If you assume that the pension fund could earn 10%, then you have too much money in the pension. That excess money rightly belongs to the shareholders. The board is giving your money to the employees!”.

    In the 90’s, it was not hard to earn those rates of returns. So pension projections were tweaked, the funding was reduced, and the company kept the extra money.

    On the other side of the coin were the liability projections. Pensions that promise medical benefits found that the increases in medical care costs far exceed what they planned for. They made mistakes like using older, and shorter, life-span numbers. Thus the pension is supporting people longer than they expected.

    The guys in charge of the numbers were allowed to play fast and loose with the numbers used to project future liabilities. Every time the government tried, or tries, to force some sanity into to the rules, the companies cry foul and get Congress to force the regulators to back off.

    The reality is that the projections were unrealistic. So more and more pensions are finding that they aren’t earning enough to cover their liabilities. So the pension then turns to the company for money to make up the shortfall. The company says “No… I’d rather file for bankruptcy”.

    To make matters worse. If a company tried to do the right thing and use realistic numbers for their pension projections, it would leave the company open for a take over. The take over party could use the so-called “fat” on the pension to fund a take over.

  • avatar

    Let me also add that because of all the pension headaches, pensions aren’t offered any more in the US. Only government employees are offered them now.

    Instead of a pension, most companies offer 401k’s, which are self funded. Some companies will match funds up to a point.

    401k’s are not insured or guaranteed. And in a lot of cases, they are looted by small companies needing cash. If you want to read something scary, follow the DOL’s media page where they crow about all the companies they have caught abusing their employee’s 401k’s. They must bust 3-4 a week for looting.

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