Corporate Retiree's Health-Care and Pension Plans

Editor's Note- Because of the importance of the issue of the deficit in the Pension Benefits Guaranty Corporation and the growing numbers of companies that are walking away from their pension obligation we have started an article on "The Pension Benefits Guaranty Corporation (PBGC) and Corporate Bankruptcies".

In respect to the issue of health care and pension plans for governmental organizations please see our article "Federal, State and Local Government Pension and Health Care Plans"

(8/27/08)- A U.S. District Court judge in Akron, Ohio, approved the Voluntary Employees' Beneficiary Association (VEBA) trust that was set up by the Goodyear Tire & Rubber Co. and the U.S. Steelworkers union as we discussed in our item dated 2/11/07 below. We also discussed these VEBA plans in our items dated 10/25/07; 7/9/07 and 2/3/07 below.

Goodyear said it would put $1 billion into the fund, and that the fund would take on the $1.2 billion health-care obligation for the company's current and future steelworkers' retirees.

In setting up the VEBA, Goodyear will be able to move billions of dollars in liabilities off its financial statement, even though the company will have to make present contributions of cash and securities to the fund. The VEBA will now assume the administration, operation and costs of health-care plans for Goodyear steelworker members and retirees.

(8/15/08)- GM spent $1.3 billion on health-care benefits for its active hourly and salaried workers last year. The company is looking to cut back on its expenses because of the billions of dollars that the company has lost over the last few years.

In a letter to its hourly 67,000 workers, the company gave them until August 20^th to voluntarily remove dependents who should not be covered under their health policies. After that date, employees must prove that covered family members are eligible. The company has audited health benefits before, but this new effort is more extensive than in past years.

A GM spokesperson said, "GM spends $4.5 billion on health care and we want to make sure our employees who are eligible for the best health care are receiving it."

(7/21/08)- GM recently announced several cutbacks and buyouts including the announcement that it would cease medical coverage for its salaried retirees age 65 and above starting in January 2009. The company's unionized workers are not affected by this announcement.

GM is just the latest among many companies that are eliminating health care coverage for its retirees, even though it had promised, in writing, during their careers that the health care benefit was a lifetime benefit. Yes, unfortunately the courts have upheld corporations who have gone a similar route to GM.

The company did announce that it would increase monthly pension payouts to help the retirees with the increased cost. GM has about 40,000 white-collar workers in the U.S. and Canada.

IBM Corp., Delta Air Lines and Coca Cola Enterprises are among the several large U.S. companies who have capped the amount that they will pay in premiums, leaving retirees to make up the rising differentials in the health-care cost premiums.

Last year Ford Motor Co. also eliminated health benefits for Medicare-eligible salaried retirees, and replaced it with an annual $1,800 stipend that may be used for Medicare and other health-care costs.

(4/9/08)- The UAW's membership fell below 500,000 in 2007, the lowest level since WW II, according to a filling by the union. In the 1970s, the union reported a membership of 1.5 million.

(2/29/08)- The Treasury Department has issued a ruling that allows companies to freeze the pensions of older workers in certain cases without running afoul of laws meant to protect employees' nest eggs.

The issue involved in this matter is whether employers that change from traditional pensions to so-called cash-balance plans can freeze the growth of older workers' pensions for months or even years following the change, even as younger workers' pensions continue to grow. This practice is known as "wearaway".

Many companies let employees remain in the old plan for a time, but that only delays the onset of the "wearaway". The Treasury ruled that decades-old "backloading" laws that effectively prohibit companies from temporarily freezing pension growth don't apply when the freeze is delayed, even if it is eventually implemented.

Over the past decade, thousands of employers shifted from traditional pensions to cash-balance plans. These conversions save the employers a lot of money, and many companies low-balled older workers in establishing an opening account balance.

Congress banned wearaway in the 2006 Pension Protection Act, explicitly saying that companies adopting cash-balance plans after June 2005 must give everyone the full present value of their pension. The law did not address the issue of companies that had already converted their pensions. The law did allow the Internal Revenue Service to begin reviewing plans dating back to 1999, and in a review of more than 1,250 cash-balance plans last year the agency found widespread back-loading violations. The IRS could therefore have required companies to pay out billions of dollars in pension benefits to current and future retirees.

The employers responded with an intense lobbying campaign to about two dozen Congressmen, and the effect of that lobbying campaign is shown by the Treasury ruling. The Treasury and the IRS now agree that employers aren't violating back-loading laws when they give employees a pension option that delays "wear-away" but doesn't eliminate it.

For more on the matter of pension conversions from defined-benefit to cash-balance please see our article dated 1/26/07.

UAW president Ron Gettlefinger said that the union expected that between 15,000 to 20,000 of its members would accept GM's latest buyout offer, on top of the 34,100 members of the union who accepted the company's 2006 buyout offer. There are presently about 74,000 UAW members at GM.

About 21,500 GM workers have been with the company for at least 30 years. These workers can elect to take a lump-sum payment of $45,000 or $62,500, depending on their job description, and retire with full benefits. Early-retirement packages also are available, as are cash buyouts of as much as $140,000 for anyone willing to forgo health care and other benefits.

Under the recent 4-year contract that the company signed with the union last fall it can hire a maximum of about 16,000 workers into so-called non-core jobs, at wages of $14 to $16 an hour, compared with the $28 an hour that assemblers make now. Including benefits and retiree health care costs, each worker who leaves under the buyout program and is replaced by someone on the lower pay scale would save GM about $48 an hour, or nearly $100,000 a year.

(2/8/08)- Continuing the trend in the auto industry to reduce its labor, pension and health care costs, Chrysler has offered as much as $100,000 to its hourly workers in the Detroit area as part of its plan to cut as many as 10,000 more jobs.

With this latest offer nearly all of the company's hourly workers will have been offered the option to leave their job, in return for surrendering pension and health-care coverage. Ford Motor Co. recently began a second round of company buyouts, and GM extended buyout offers to about half of its workers.

Please keep in mind that the recently negotiated contract between the auto companies and the UAW allows for a two-tier wage system. The companies can replace an older worker making about $28 per hour, with a new worker starting at $14 per hour who has less benefits than does the older worker.

Anyone who has been with Chrysler for at least one year can elect to take a lump-sum payment of up to $100,000 in exchange for giving up health care and most retirement benefits. About 4,600 of the company's 12,000 UAW workers are eligible for this plan. The company made a similar offer to its employees last year, and as of last June, 6,400 of them had accepted the offer.

The offer is open until February 18^th, according to a company spokeswoman, Michele Tinson.

(10/25/07)- UAW workers at both GM and Ford have voted on and approved the recent contract negotiated between their union and the companies for whom they work. Please keep in mind that the UAW ranks have dwindled by over 40% since their prior contract was negotiated in 2003.

The UAW represents about 49,000 workers at Chrysler, 58,000 at Ford and a parts operation, and more than 73,000 workers at GM. The newly negotiated contract calls for a two-tier salary level wherein newly hired workers will be on a lower pay scale, and have less benefits than will the older workers. The job banks for UAW workers laid off by the companies, wherein they receive 95% of their pay while not working, will be slowly phased out.

The newly established Voluntary Employees' Beneficiary Association (VEBA), at these companies are in fact not really new. For more info on this subject please see our articles dated 7/9/07; 2/11/07 and 2/3/07. The trust established by GM will be funded with cash and securities valued at about 70% of the $51 billion obligation. In the event of a bankruptcy by GM, creditors of the company cannot reach this fund. GM in turn will be removing $51 billion in liabilities from its balance sheet.

The UAW was formed in 1935, and it negotiated its first health-care benefit in 1950. GM agreed to pay half the cost of hospital visits and surgeries for workers and family members.

In 1961, the union won full health-care coverage for active workers and one-half coverage for retirees. The next contract brought full coverage for retirees. The 1967 contract gave full coverage to surviving spouses. The 1970 contract allowed workers to retire after 30 years of working for the company, extended hospital and surgical coverage and added prescription-drug benefits.

Please keeps in mind that about one-third of large companies in the U.S. already have VEBAs. They include Conagra Foods Inc., Duke Energy, Ford, Kellogg Co.and Texas Instruments.

(8/28/07)- The roughly 2,000 members of the International Union of Electronic Workers-Communications Workers of America voted to ratify a new four-year contract with Delphi Corporation. For more on this story please see our item dated 7/9/07.

The U.S. Bankruptcy Court in New York approved the deal last week, so the contract goes into effect immediately. Delphi had petitioned for bankruptcy in October 2005. The deal had been reached on August 4 but required both union membership and court approval before it could go into effect.

The electronic workers union has members at three plants that Delphi plans to keep- in Warren, Ohio, and Brookhaven and Clinton, Mississippi. We would like to reiterate that this contract agreement between the unions and the company has far reaching implications for future health and pension benefits for all of labor in this country.

(7/24/07)- A recent survey from the Employee Benefit Research Institute and Mercer Human Resources Consulting found that employers are embracing key provisions of the Pension Protection Act of 2006 that allows them to ensure that workers save and invest in their 401(k).

Next year more workers will find that they are automatically enrolled in company retirement plans that automatically deduct money from their paychecks. Workers who do not select any investment choices will find their money will be placed in lifecycle or targeted-date funds, in which the investment mix automatically changes over time.

A Fidelity Investments poll of 400 plan sponsors found that 44% are considering adding auto enrollment, 27% may add automatic increases in contributions, and 31% are considering lifecycle funds as the default option,

Before enactment of the Pension Protection Act many employers were concerned about state laws that prohibited businesses from withholding money without the employee's consent.

(7/9/07)- The UAW and the United Steelworkers union have reached agreement with Dana Corp., one of the nation's biggest auto parts companies, which is operating under bankruptcy protection in regards to the companies retiree health care and long-term disability coverage. Under the agreement Dana will shift its liability for those items to a trust, called a Voluntary Employees' Beneficiary Association (VEBA), and thus remove those obligations from its books.

For additional information on VEBAs please see our items dated 2/3/07 and 2/11/07 below. Under the agreement Dana will contribute about $700 million in cash, and once it reorganizes, $80 million in stock to the trust, which will be administered by the unions. The first time that the UAW and a company reached a similar type of agreement was in 1992 and involved Navistar, a truck company then in bankruptcy also.

On July 23rd the UAW and GM, Chrysler and Ford will begin formal negotiations for a new contract since the old one expires on September 30, 2007. These three companies face a burden of over $100 billion for their retiree health and long-term disability coverage. Analysts estimate that the automakers would have to contribute at least $70 billion in cash to VEBA trusts. It will be very interesting to see if this will be the way the negotiators go in this area when the negotiations are completed.

(7/4/07)- The UAW workers at Delphi voted strongly in favor of accepting the latest offer from the company even though it provided for a cut in their salaries from about $27 per hour to a range of $14.50 to $18 per hour; the closing of all but 4 of the companies 18 plants; and giving back their "job bank" guaranteed salary during the period of time that the were laid off.

The deal, which covers 17,000 hourly workers, was approved by 68% of the workers who voted. The bankruptcy judge, Judge Robert D. Drain of the Federal Bankruptcy Court in Manhattan, must still give his final approval before the pact can be declared operative.

This agreement has tremendous implications for the impending negotiations that will start this month between the auto companies and the UAW, since the union has always operated within the context of pattern bargaining. Thus it is likely that the "job bank" worker protection will fall by the wayside in the auto industry. Delphi had filed for bankruptcy in 2005.

In exchange for accepting the lower wages, the workers will get three annual "buy down" payments of $35,000 for a total of $105,000. They can also elect to take a buyout of as much as $140,000 to leave their jobs and give up all benefits except pensions. Those already eligible to retire could accept an incentive of $35,000 to retire with full benefits.

The payments will be financed mainly by GM, which will have a liability of in excess of $7 billion as a result of the deal.

When a worker is laid off he will receive a severance pay of $1,500 for every month of service, to a maximum of $40,000

(6/30/07)- A little noticed pension measure that was inserted into last month's Iraq war spending measure has come into the limelight recently since it gave American Airlines a break worth about $2 billion, and Continental Airlines a break worth slightly less.

The measure will allow American to greatly reduce its payments into its employee pension funds over the next 10 years. At the end of 2006,the funds had assets of $8.5 billion, and needed an additional $2.5 billion to cover its obligations. The new provision will allow American to recalculate those numbers, so that the shortfall disappears and the plans look fully funded.

The measure was introduced by senators from Texas, where American and Continental are based, and Illinois, where American has a big hub at O'Hare International Airport. Legislators who introduced the legislation defended it, because American's two big rivals, Delta and Northwest had received special breaks in sweeping pension legislation enacted last year, when the latter two airlines were in bankruptcy court. That break gave the bankrupt airlines a competitive advantage over American and Continental.

In the last few years, American has been putting $300 million a year into its pension funds, that it can now use for other purposes. The pension relief that was granted to Northwest and Delta under the Pension Protection Act of 2006 will last for 17years.

(5/30/07)- When GM spun off its auto-parts supplier subsidiary Delphi Corp in 1999 it assumed the pension and retiree health care costs for all of its former employees. With Delphi having gone into bankruptcy in October 2005, the UAW, GM and the company have been trying to negotiate what GM is actually going to be responsible for when Delphi emerges from bankruptcy.

GM recently announced that it would take another $1 billion charge in its second quarter earnings, when it reports that quarters earnings, to cover retirement and health care costs for workers at Delphi.

This additional $1 billion charge would bring the total cost to GM to $7 billion, when taken with the earlier charges that GM had announced in this matter. GM said that it has received several new proposals from Delphi and the UAW that "provide a basis for continuing productive negotiations".

This Delphi bankruptcy matter is critical for all future dealings between the workers and all companies that go the bankruptcy route in determining how much the bankrupt company is responsible for in connection with retiree health care costs. Please keep in mind that when a company goes into bankruptcy, pension agreements for the workers are no longer enforceable and the PBGC assumes the pension liablities.

(5/25/07)- New Jersey legislators (see item dated 4/18/07 below) stuck their heads in the sand when it came time to seeing the effects of the pension benefits deficits that the state was running up, and now Texas legislators are going to hide their heads, when it comes giving an accurate picture of the future health care costs promised to retired employees.

Under recent changes made by the accounting profession municipalities are required to start to show on their balance sheets what the cost will be for the health benefits of state employees when they retire. Corporate America has had to deal with this issue, but state legislators in Austin intend to pass a law that will sidestep this new accounting rule for municipalities.

Most municipal governments up till now had been showing their health care costs only on a pay-as-you-go basis, which in reality does not show what the cost will be when the employee retires. It will be interesting to see if any other states follow Texas, so that they too will not have to deal with this problem early enough before it becomes a real drag on the state's economy.

(4/18/07)- New Jersey state senators from both sides of the aisles said that they were shocked to learn that they had voted for measures that had left the state pension fund in deficit. At a hearing that was held by the Senate Budget and Appropriations Committee, in response to the article by Mary Williams Walsh that we discussed in out item dated 4/8/07, many of the legislators faulted the state treasury for failing to explain to them the risk of what they were voting for.

The latest estimate is that there is a $25 billion pension deficit according to the state's treasurer as of the state's 2006 fiscal year, up from $18 billion in 2005.

Before being injured in a recent automobile accident Governor Jon S. Corzine asked the state attorney general to investigate, with outside actuarial help, whether tax requirements, securities laws or other rules have been violated. Unfortunately many other federal, state and local elected officials are going to echo the same complaint when they find out that they voted for pension measures that they did not understand.

The New Jersey attorney general Stuart Rabner may have a conflict of interest in this matter since he currently represents the State of New Jersey in lawsuits, filed by several state employee groups, that accuse the state of failing to fund workers' pensions lawfully.

The office of the attorney general has also said in audited financial statements that the state's pension plans are "qualified" as tax preferred plans. Normally, only the IRS can issue a ruling that a pension plan is qualified. New Jersey's annual reports state that its pension plans are "qualified" based on a 1986 declaration of the attorney general of the State of New Jersey.

The IRS said that it had no record that New Jersey had ever requested to have its pension plans "qualified " under the tax law.

(4/8/07)- Mary Williams Walsh recently wrote an article in the N.Y. Times entitled, "New Jersey Diverts Billions, Endangering Pension Fund" that brought to the front page the crisis that awaits many federal and municipal pension funds. To quote from the article"

"In 2005, New Jersey put either $551 million, $56 million or nothing into its pension fund for teachers. All three figures appeared in various state documents- though the state now says that the actual amount was zero."

She went on to state, "The state recorded investment gains immediately when the markets were up, for instance, then delayed recording losses when the markets were down. It reported money to pay for health care costs as contributions to the pension fund, though that money would soon flow out of the fund. It claimed it had "excess" assets that allowed it to divert required pension contributions to other uses, like providing financial assistance to poor school districts."

The Democratic governor of the state, Jon Corzine, has appointed a committee to look into this matter. As we point out in the items in the article below this is just the tip of the iceberg. Just as Corporate America is now having to deal with its health care and pension problems, the federal, state and city governments will be faced with a crisis on this issue.

(3/19/07)- The state of New Jersey has the ninth largest public pension system in the country with assets of about $75 billion, as of last September. According to one of the council members that oversees the investments by the fund, the state has been vastly underestimating how much money it should have to pay for the retirement benefits that have been promised to its employees.

The council member, Douglas A. Love, the chief investment officer for Ryan Labs Inc. in New York, stated that a more accurate calculation would show a $56 billion deficit, rather than the $18 billion that was shown in the prospectus that accompanied the state's last bond issue.

Mr. Love's way of calculating the pension's obligations is similar to the method a bank or an insurance company would use. New York City's chief actuary, Robert C. North, ha been using that method to show that the city's pension deficit may be billions more than shown in official projections.

Negotiations are pending between the state and its employees to increase their contribution to the state pension fund, and also to raise the retirement age for new employees to 60 from 55. The state is also considering whether or not to lease the New Jersey Turnpike so as to produce a long-term stream of cash payments.

(3/13/07)- Officials of the state of Texas are looking for ways out of the new accounting rule that is being phased in over a three year period of time, that require governments to disclose the cost or retiree health-care costs in their financial reports. The numbers are to be disclosed in footnotes to local government's' financial statements.

The obligations will not be disclosed on their balance sheets, nor is there any requirement to show how the municipality intends to meet these obligations. New York City recently disclosed that its obligation for retiree health care was $53.5 billion.

State Senator Robert Duncan, a Republican from Lubbock has introduced a bill that would make the new accounting rule inoperable in Texas. Texas state comptroller, Susan Combs recently wrote a letter to the head of the accounting board (GASB) saying that she doubted that the new rule had any validity in Texas.

State officials argue that there is no legal obligation on the part of the state to meet these retiree health care costs. Just as corporations that go into bankruptcy can walk away from their retiree health care costs, municipalities can do the same also.

(3/6/07)- Analysts at Standard & Poor's, the credit rating agency, report that state government's unfunded pension liabilities continue to increase in spite of the rise in tax receipts by most states.

The report states that there is about $330 billion in unfunded pension obligations in fiscal 2005, the last period for which complete data is available. That is an increase of $46 billion from the level that it was at in 2004.

The gap in the unfunded amount of projected liabilities, is based on the current work force and benefit levels for each state.

Among the states with the largest level of unfunded liabilities are Connecticut, Illinois, West Virginia and Oklahoma. The state in the best shape was Florida, with obligations funded at 107.3%, followed by North Carolina, Oregon, Delaware and Georgia.

(2/11/07- The agreement between Goodyear Tire & Rubber Co. and its largest union, the United Steelworkers Union set up what is known as a Voluntary Employees' Beneficiary Association (VEBA) which has been around since the early 1920s. According to the IRS, there were about 12,500 VEBA trusts around in 2005, the latest year for which these records are available.

Because of the surge in bankruptcy filings in the steel and airline industries the last few years, with the resulting decrease or even loss of pension benefits even if the PBGC takes over the company's in bankruptcy plans, the unions are more interested in VEBAs than ever before. Please keep in mind that the PBGC does not protect health-benefits,

The United Steelworkers union created a VEBA trust in 2002, shortly after Bethlehem, LTV, Acme Metals and Georgetown Steel went into bankruptcy. The billionaire investor Wilbur Ross wanted to buy some of the bankrupt steel companies, but he was not willing to take on the health-care and pension benefits that these companies were saddled with..

The union suggested forming a VEBA trust fund to assume responsibility for its members. The union agreed to manage the fund through a committed of three representatives from the union and one from the company. The steelworker's fund also receives contributions from Mittal Steel Co., which bought out Mr. Ross' company based on earnings and steel shipments.

With the turnaround that has occurred in the steel industry, the fund has received greater contributions from the employers, and this enable the fund to offer prescription drug coverage to its members in 2005.

(2/3/07)- An agreement that was reached between Goodyear Tire & Rubber Co. and its largest union, the United Steelworkers Union may have a profound effect on all pension and health-care plans of companies in the U.S. As a matter of fact the auto companies and the U.A.W. are presently discussing the settlement to see if they can work out a similar arrangement.

Under the Goodyear deal, the company agreed to transfer its $1.2 billion health-care liability to a fund managed by the steelworkers union. The company is going to put $1 billion in cash and equity into the fund. Under the terms of the deal future benefits to union retirees would be administered by a trust, with its assets legally separate from the company. Three of the trustee who administer the fund would be designated by the union and four independent members would be jointly selected by Goodyear and the union.

The committee would manage the trust's assets and maintain the benefits programs. The union and the company would no longer bargain over retiree health benefits.

If Goodyear runs into financial difficulty, or files for bankruptcy, the money in the trust would be available for the exclusive benefit of the retirees. Goodyear initially has contributed $700 million in cash, and $300 million in Goodyear stock. The company would also provide for cost-of-living allowances and profit-sharing contributions that the union estimated could cost the company an additional $135 million.

As far as the auto workers and the UAW goes however one of the big stumbling blocks to a similar type of plan would be where GM and Ford would get the assets to contribute into the fund that would deal with future retirees' health benefits.

A J.P.Morgan analysis estimated that GM has about $55 billion in future union and current health-care liabilities. In the case of Ford that liability is estimated to be about $22 billion.

A recent estimate from Towers Perrin, a Stamford, CT benefits consulting firm shows that the pension plans of the Fortune 100 companies ended 2006 with 102.4% of the assets needed to pay their employees pensions. That is up substantially from a low point of 81.9% in 2002, though still below the 125.8% recorded at the height of the stock market boom in 1999.

A similar improvement showed in a study from Watson Wyatt Worldwide another consulting firm. This study showed that the pension funds for a group of 1,000 companies were about 91% funded in 2005, up from a little more than 80% that was funded in 2002.

The Towers Perrin study looked at the defined-benefits plans of 79 companies on the Fortune 100 list. Stock market gains were the biggest reason for the improvement, but rising interest rates also helped to reduce the pensions' liabilities. Increased contributions by the companies also helped to increase the assets of the pension plans.

(1/26/07)- The U.S. Supreme Court decided against hearing arguments in the IBM pension plan conversion case. This is the matter we discussed in our items dated 9/10/06 and 8/16/06 (highlighted in red) that involved the company's conversion of its pension plan from a defined-benefits to a cash-balance plan.

This decision does not however resolve any of the other cases still pending on this type of conversion. IBM and the current and former workers who filed the lawsuit had previously reached a settlement in which the plaintiffs would receive $320 million to settle part of the case. If the workers won on the central question of age discrimination the company would have had to pay them an additional $1 billion.

The IBM freeze on its defined-benefits plan will go into effect in 2008 at which time its workers will receive an enhanced 401(k) plan.

The enactment of the Pension Protection Act in 2006 states that companies that convert to cash balance plans after June 30, 2005 cannot be held liable for age discrimination as long as they pass certain basic tests. The IRS is still in the process of writing the regulations needed to administer the act.

In December 2006 the IRS announced that it was ending its longstanding moratorium on approvals of pension conversions to cash-balance plans

(1/12/07)- British Airway confirmed that it had reached an agreement with its four main trade unions on a package of changes to lighten its $4.1 billion pension deficit. The agreement includes reductions in benefits for the union members.

The company agreed to make a one-time contribution of $1.5 billion into the pension fund, subject to the benefit changes. That contribution, together with a one-time employee saving of $750 million and changes in future benefits, will reduce the pension deficit by more than half.

Included in the changes is the retirement age for 2,500 of the company's pilots being increased to 60 from 55, and for other staff to 65.

(12/16/06)- Delta Air Lines, which is operating in bankruptcy has reached an agreement to partly compensate the Pension Benefit Guaranty Corp.(PBGC) for taking over its pilot pension plan. Under the terms of the agreement Delta would give the agency an unsecured claim of $2.2 billion. The claim will be worth far less than its face value, but it will be convertible into the right to buy Delta shares after the company emerges from bankruptcy.

In addition, the company will give the agency notes valued at $225 million after the company emerges from bankruptcy.

The PBGC had initially sought an unsecured claim of $3 billion, roughly the amount that the agency had estimated as the shortfall in the plan for Delta's pilots. The plan covers about 13,000 active and retired Delta pilots.

A larger pension plan covering flight attendants and ground workers at Delta remains with the company and, as part of the agreement with the PBGC, Delta agreed to preserve that plan. This plan covers about 91,000 active and retired workers.

Also as part of the agreement on the pilots' plan, Delta said retired pilots would receive an unsecured claim of more than $800 million to partly compensate them for lost pension benefits.

(11/29/06)- Municipal and state governments are now first coming to grips with the same pension and health care benefits problems that corporate America has been facing for the last few years. In the most prominent case since the Orange County California bankruptcy in 1994, the city of San Diego California announced a settlement with the Securities and Exchange Commission (SEC) for misleading municipal bond investors about the condition of its municipal workers pension fund.

This was the first time the commission has sanctioned a municipality since the creation of the Office of Municipal Securities (OMS) which was created within the agency because of the Orange County bankruptcy. In general, the SEC has no power over municipalities, except in the case of municipal bond fraud.

The SEC found that from 2002 to 2003, San Diego misled investors and credit rating agencies about the amount of money it had promised to retired city workers and how the promises might threaten its ability to pay its bond obligations.

As part of the settlement, San Diego agreed to hire an independent monitor for three years and to follow the monitor's instructions for improving its disclosures and compliance with securities law.

The city agreed to the settlement order without admitting or denying the SEC's findings, which were summarized in a 22-page cease-and-desist order. The order said that the officials of the city knew that the city's pension fund was in trouble in 2002, at which time there was a $284 million shortfall, which was projected to grow to a $2 billion shortfall by 2009.

Included in the findings was the fact that city officials knew that the city had promised about $1.1 billion in health care benefits to retirees, without setting aside money to cover the cost.

Linda Chatman Tomas, director of the SEC's enforcement division said: "This action signifies our resolve to hold state and local governments accountable when they commit fraud while seeking to borrow the public's money."

(11/2/06)- If you are thinking of taking a lump-sum payment from your defined-benefit pension plan when you retire, you better think twice before making that decision. The recently enacted pension law cuts the amount that you may be getting as a lump sum, and unfortunately is retroactive, so it may mean that an individual who received such a payment earlier this year, may have to refund some of that payment.

The changes do not affect pensions that will be paid monthly, so this may be the better route to go for many individuals who will be making that decision. The new pension law made two changes that reduce the lump sum that a retiree receives upon retirement.

In determining the amount of the lump sum payment, a company determines this amount by taking the monthly payment the retiree is entitled to and then figuring how much this is worth as a lump sum in today's dollars, making certain assumptions about life span and future investment returns. Under the new pension law, companies, starting in 2008, will be able to assume a higher investment return, using a corporate-bond interest rate rather than the lower Treasury-bond rate previously used.

This change produces a smaller lump sum payment, because the higher rate represents the return an employee would have to earn to generate the same retirement income as if he were receiving the pension as a monthly check. This change will be phased in over a 5 -year period of time.

The other change that has been made by the new pension law stems from a calculation companies must make that places a cap on the maximum amount a retiree can receive when it is converted to a lump sum. Congress controls the maximum size of pension payouts since contributing to the plans offers employers certain tax advantages.

For 2006, the biggest annual pension a person age 62 to 65 is allowed to receive from a taxpayer-subsidized plan is $175,000. This cap, which is lower for younger pensioners, increases each year to account for inflation.

In calculating this sum, the new law requires companies to use a higher interest rate-5.5% up form a variable rate that was below 5% most of this year-as the assumed rate of return, which effectively lowers the maximum allowed lump-sum payment

(10/13/06)- According to an article in the Detroit Free Press, General Motors and Delphi Corp., the auto supply company that was spun off by GM several years ago, are close to signing a memorandum of understanding, whereby the auto company would provide a substantial subsidy to Delphi for its labor costs. In providing the subsidy, the parties hope to avoid a strike against Delphi by the UAW, because of the substantial cutbacks that the company is seeking to impose on its employees in the bankruptcy proceeding.

The memorandum could be completed by the end of the month. The subsidy will mean that Delphi would not have to impose exceedingly drastic salary, health and pension benefits from its employees as it might legally be able to do under the bankruptcy laws..

Delphi would continue to be GM's largest supplier when it emerges from bankruptcy, while GM still would be able to get the $2 billion in parts savings that it seeks from the auto-supply company.

The UAW had previously stated that it would not accept an offer below the second-tier wage in the contract. New hires at Delphi make about $14 per hour, not including benefits, compared with $27 an hour for current workers.

(10/4/06)- One of the most interesting developments that is occurring in the Delphi Corporation bankruptcy proceedings is that a fourth major player has entered into the picture. In addition ot Delphi, GM and the UAW, the billionaire hedge fund manager David Tepper is investing millions if not billions and as of last count owned 9.3% of Delphi stock.

Please keep in mind that Kirk Kerkorian has already invested billions in GM.

This bankruptcy proceeding has significant implications as to how corporate America will deal with the high cost of pension and health benefits, in addition to salary that corporate America claims is making this country non-competitive with the rest of the world.

Seventy three percent of the 27,500 union workers on Delphi Corporation's payroll as of June 30 have accepted the buyout offers from the company. Those who have decided to leave must do so by January 1, 2007.

About 1,400 workers represented by the United Automobile Workers union accepted buyout packages worth as much as $140,000, in addition to the 12,400 U.A.W. workers who are taking the early-retirement option. About 6,300 members of Delphi's second-largest union, the International Union of Electrical Workers-Communications Workers of America, who have agreed to retire or leave through buyouts.

Judge Robert Drain of the U.S. Bankruptcy Court in Manhattan has set a closed door hearing date in his chambers for October 19 in connection with the company's request to void the union contracts.

(9/30/06- Accounting standards setters have issued their final ruling that will require companies to include on their balance sheets the overall deficit or surplus for their retirement plans, instead of being inserted as a footnote. This however is only the first step in what will be a long drawn out process for changes to be made in regards to pension accounting.

The Financial Accounting Standards Board plans to remodel all accounting rules related to pension and other retiree benefit plans to eliminate the smoothing out over years of pension and health benefits. Under the new rules pension obligations will be measured so as to include future salary increases for employees.

Future increases in health benefit costs will not have to be included under the newly announced rules, but this matter will come up for future discussion. The FASB expects to take at least two to three more years before all final new rules are issued.

(9/21/06)- Delphi Corp. was granted a delay in the hearing before the U.S. Bankruptcy Court in Manhattan in connection with its request to void its labor contacts. The company is also seeking to abrogate its pension plans and health benefit obligations to its workers. This matter is of key importance to GM also, since GM guaranteed these agreements when it spun Delphi off as a separate company.

Judge Robert Drain postponed the hearing indefinitely, but he will decide on a new hearing date after getting a progress report on how the negotiations are going between the company and the UAW, the union that represents its workers, on September 28"We continue to make progress, and the adjournment allows us to continue in that effort, said Claudia Piccinin, a Delphi spokeswoman. The union has threatened to strike if the company abrogates these contractual obligations, plus the sharp salary cuts that are being demanded by the company.

To see more on this matter, please see our items dated 6/5/06 and 6/13/06.

(9/20/06)- Ford Motor Co. plans to offer buyouts to all 75,000 of its North American factory workers, hoping to cut its payroll costs by nearly a third. Ford's buyout plan is similar to the one that GM recently offered to its workers, of whom about 34,000 accepted the offer. The UAW could end up losing about 50,000 members this year.

The most generous of Ford's eight different buyout packages is limited to workers with at least 30-years of service, or those that are at least 55 years of age, and have at least 10 years of service. They would receive $140,000 to leave immediately, and would keep their pensions, but would have to forfeit their retirement health care coverage.

For workers who want to go to college or vocational school for four years, Ford will provide half their usual pay, about $27,000 on average4, while they receive full medical coverage and their tuition is paid in full.

(9/14/06)- The president of the United Automobile Workers, Ron Gettelfinger said that the Chrysler Group was strong enough financially that the union would not extend its help in connection with "givebacks", as it did with GM and Ford.

Mr. Gettlefinger, speaking to reporters after a speech to the Detroit Economic Club, also said that the union was not willing to do more to help the Dephi Corporation, the auto parts-supply company, with any more "givebacks". He went on to say that the union would call a strike if a bankruptcy court judge agrees with Delphi's request to void the union's contracts.

An audit commissioned by the union found that such concessions were not warranted in the case of Chrysler, according to Mr. Gettlefinger. Even though Chrysler spent $2.3 billion on health care for employees and their families so far this year, the company was profitable, which was not the case for GM or Ford.

(9/10/06)- The full Court of Appeals for the Seventh Circuit, in Chicago refused to reconsider the ruling by the three member panel of the court in a decision that we discussed in our item dated 8/16/06 below. That decision upheld the legality of the IBM cash-balance conversion plan from a defined-benefits plan.

The lower court had ruled that the conversion discriminated against older workers of the company. Lawyers for the plaintiff announced that they would appeal the reversal to the Supreme Court of the U.S.

(9/7/06)- DuPont Co. became the first major U.S. company to cut its employees' pension benefits since the enactment of the Pension Protection Act of 2005. In this case, DuPont's pension plan is a healthy one, but the company acted to compensate for the reduction in employee benefits by enhancing their 401(k) plans.

DuPont's $23 billion pension plans do have a shortfall of $3.1 billion, but most of that ($1.8 billion) stems from pensions for executives, which are not funded in advance, and its foreign employees, where funding is not required.

The company said that it expects the pension cut to boost earnings by three cents a share in 2007.

Pension cuts can increase corporate earnings because they reduce the liabilities that are carried on the books for future pension contributions. New hires will not receive a pension from the company.

DuPont will provide an automatic 3% contribution to all workers 401(k) plans, and begin matching employee contributions dollar-for-dollar up to 6% of pay. DuPont currently matches only 50 cents on the dollar.

(8/29/06)- The U.S. District Court for the Eastern District of Michigan made permanent the terms of an earlier temporary injunction that blocked ArvinMeritor, a Troy, Michigan auto-supply parts manufacturer, from lowering the health-care benefits of its retirees age 65 and older.

The UAW and the United Steelworkers unions had gone to court to prevent the company's restructuring efforts, because it violated the terms of a previously negotiated collective-bargaining agreement. They also brought the claims under the U.S. Employee Retirement Income Security Act, the federal law that sets standards for most private pension plans.

The injunction requires the company to resume paying the full cost of health benefits for UAW retirees at the levels that were in place before the company made changes to those benefits in 2002 and 2004. Arvin said it plans to appeal the ruling.

(8/25/06)- Tenneco Inc., the Lake Forest, Ill., auto-supply maker of items such as Monroe shock absorbers and Sensa-Trac struts announced that it is freezing its employees defined-benefits pension plans as of the end of this year. The company thus joins a long list of big U.S. corporations that are freezing their defined-benefits pension plans.

The company will instead offer its employees a defined-contributions plan, which usually means a 401(k) plan starting January 1, 2007. This information was contained in the required filing that the company made with the SEC.

Tenneco expects to save about $11 million pretax per year under the changed setup. The company employs about19,000 employees world-wide.

The company will book a gain of $6 million to $7 million in its fourth quarter earnings report as a result of the change. Under 401(k) plans, companies contribute funds to an employee each pay period, but have no future payment obligations.

(8/22/06)- Now that the Congress has passed legislation as to the legality of cash-balance pension plans, and the court has upheld the conversion of defined-benefit plans to cash-balance plans lets take a look and see what most of corporate America is doing these conversions.

When a corporation changes from a defined-benefits pension plan to a cash-balance plan, the first thing that it does is "freeze" the workers pension that they have earned under the old plan. The employer than calculates what this "frozen" pension would be worth if it were paid out in a lump sum of cash.

This "frozen" pension value becomes the "opening account balance" which will grow with future contributions and interest. Companies can save money and boost their profits by these conversions. Companies calculate how much they expect to pay out in pensions over the lives of their employees, including amounts workers have not yet earned, and then reflect that amount as a liability on their books.

When pension liabilities are cut, the estimated amount that will no longer be paid out will be added to income, thus increasing a companies "earnings".

Under the Pension Protection Act of 2005 that was recently enacted by Congress and signed by the president companies can use an interest crediting rate that could turn negative, potentially wiping out the interest credit previously earned.

Last year, the Government Accounting Office concluded that most workers, regardless of age, get lower retirement benefits when employers convert from traditional pension plans to cash-balance plans. The GAO study also found that more than one-third of workers in both traditional and cash-balance plans fail to vest.

S&P, the credit-rating firm studied the employee pension level funding of 20 large U.S. cities and found that most of them had shortfalls. The study attributed the shortfalls to a combination of sizeable stock-market losses early in the decade, enhanced benefit packages to employees and longer life spans.

The survey covered the period from 2000 to 2005, although some of the cities had data only through 2004. The average level of pension funding fell to 84% from 99.8%.

The cities with the biggest shortfalls were Philadelphia, whose plan had assets equivalent to only 53% of its long term liabilities; Boston with only 65% funding; and Chicago, whose plan was only 65% funded.

New York City's pension plans for its employees were just a shade under 100% funded.

Perry Young, the study's lead author said that the lagging cities were attempting to remedy the situation. "They're managing the situation to the extent it has not adversely affected their credit quality."

(8/16/06)- The Pension Protection Bill (HR 4) was passed by the Senate without any amendments meaning it is identical to the Pension Protection Act of 2005 (H.R. 2830) that was approved by the House. The president has indicated that he will sign the bill.

There are many provisions in this new act that will have pronounced affect on the pensions of all of us.

The Act made permanent the increase in premiums to the PBGC that all employers covered under the bill will have to pay $30 per employee from the previous amount of $19 per employee, which had been in existence since the Pension Benefits Guaranty Corp. had been formed.

All new employees who will have 401(k) and 403 (b) plans will be eligible to be automatically enrolled in the plan by their employers. The new employee can opt out of joining into the plan if they see fit to do so. It will remain optional for all other employees to join or not as they see fit.

The bill modifies the tax code to permit long-term care insurance to be combined with an annuity and provides tax clarification for the combination of long-term care and insurance. It encourages insurers to sell life insurance policies and annuity contracts with long term care riders starting in 2009.

The Labor Department, which regulates the plans, is in the process of altering its rule so that employees will have other fund choices beside money market funds as their default fund.

These multi-asset investments include several different types of funds; "age-based funds", in which a portfolio of other mutual funds is tailored to a particular expected retirement date; "risk-based portfolios" of funds (such as "conservative" or "aggressive"); "balanced funds" which are a blend of stocks and bonds; and "managed accounts" which are portfolios customized to consider not just a person's age and risk-tolerance, but also other investments.

Under the new act 401(k) providers will be allowed to offer specific investment advice to members of the plan starting in 2008, but some of the new features may be implemented sooner. Specific investment advice will be able to be given if it is based on a computer model that must be certified as bias-free by an independent third party.

The new law makes it easier for companies to automatically increase the percentage of an employee's salary that is directed to the plan. It does not increase the amount of money that an employee can put into the plan.

The legislation will give most companies seven years to fully fund their pension plans and will require accelerated payments from those whose plans are severely under-funded. These rules won't go into effect until 2008, so most companies will have until 2015 to become fully funded.

If a company goes into bankruptcy and dumps its plan on the PBGC there will be a fee of $1,250 per plan participant.

The law provides an exemption for the auto companies that offered early retirement to employees in 2006. Employees who turned down the early-retirement offer and still work at the company won't have to be included in the worst-case scenario assumptions, even though those workers could eventually take early retirement.

The at-risk rules will be phased in over four years for all companies to that very few businesses will actually be deemed at-risk for the first few years.

Northwest Airlines and Delta Airlines will get 17 years and will be allowed to use a more favorable rate to calculate what they over. Continental Airlines and AMR Corp.'s American Airlines will get 10 years to fully fund their plans and may get further concessions in the fall.

(IBM)A three-judge panel has ruled that IBM did not discriminate against its older employees when it switched their pension plan to a cash-balance from their defined-benefits plan.

"All terms of IBM's plan are age-neutral," Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit in Chicago wrote in his decision, which reversed the 2003 lower federal court ruling of the Southern District of Illinois.

The plaintiffs, who are current or former IBM employees, intend to ask the full appeal court to reconsider the ruling. There are at least 1,500 pension plans similar to IBM's in place in this country covering over seven million workers and retirees.

When older workers are shifted from a traditional pension plan to a cash-balance plan, they lose the steep buildup of pension benefits in their latter years of employment, and can end up with pensions that are much lower.

Judge Easterbrook noted that since all workers of all ages in the plan received an annual 5% pay credit, the plan could not be considered discriminatory. Just because younger workers had more years to earn credits could not be considered discriminatory.

He went on to note that, "removing a feature that gave extra benefits to the old differs from discriminating against them,".

IBM and the plaintiffs had previously agreed to cap the amount of the remedy to the plaintiffs at $1.4 billion in 2004 to the 140,000 current and former workers if it lost is appeal on the age-discrimination claim.

The decision has no effect on a $320 million settlement that IBM reached with the plaintiffs on the five other claims in the original lawsuit that was filed in 1999 once all legal proceedings have terminated.

(8/02/06)- The House of Representatives, by a vote of 279-131 voted to approve the Pension Protection Act of 2005 (H.R. 2830). The measure must now go to the Senate for approval before the president can sign it. Any change to the legislation by the Senate means that the measure would then have to come back to the House for its approval.

19 Texas Republicans in the House opposed the measure saying that it favored Delta Air Lines and Northwest Airlines over the two Texas airlines Continental Airlines of Houston and AMR Corp of Fort Worth, Texas.

The bill would require most companies to fully fund their pension obligations within seven years. An exception for airlines would allow any carrier that agrees to freeze its pension benefits and close its plan to new entrants to get 17years to fund their obligations, and use a more favorable interest rate to calculate what they owe.

The exception benefits Delta, whose pensions are under-funded by $6.4 billion, and Northwest, whose pension is under-funded by $3.7 billion. Both of these companies have filed for bankruptcy and have frozen their plans.

American and Continental would fall under a different and less-favorable rule because they haven't frozen their pension plans. Carriers that don't agree to a freeze would get 10 years to fully fund their plans, and would also have to use a less favorable interest rate.

An administration official said that the president would sign the bill if the Senate passed similar legislation.

(6/23/06)- Delta Air Lines announced that it planned to terminate the pension plan covering 13,000 active pilots and retired pilots and some spouses effective immediately. The company had filed for bankruptcy on September 14, 2005. At that time the Pension Benefits Guaranty Corporation estimated that the company's total pension shortfall was $10.6 billion.

Delta has another pension plan that covers an estimated 91,000 active and retired flight attendants and ground worker. Delta is not presently attempting to terminate this plan, but would like to have the shortfall made up over a 20-year period of time.

In terminating its pilot's plan now the company hopes to avoid a liquidity crisis similar to the one that occurred last year when more than 1,100 pilots took early retirement. That plan gave the pilots the right to take half of their total lifetime benefits in a lump sum. This resulted in a draw down of over $873 million in the plan in a short period of time.

A plan may not pay lump sums unless it has liquid assets worth at least three times the previous year's payouts. Delta is concerned that between 800 to 1,000 senior pilots may be eligible to retire come July 1, 2006. The plan would not have sufficient cash available to make these payouts, so the company plans to terminate the plan.

(6/13/06)- Delphi Corp., GM and the UAW have reached an agreement that offered buyouts to all its 24,000 workers. The plan, which GM will finance, expands a plan announced in March that covered 13,000 Delphi workers. In addition GM offered to take back 13,000 of the 24,000 UAW workers at Delphi.

GM remains liable for pension and retirement health care benefits for Delphi workers who were at the automaker before the spin-off.

A federal judge postponed the hearings until August 11 on Delphi's request to void its labor contracts.

Under the buy-out plan, workers with 30 years experience would be eligible to retire with full pension and health-care benefits plus the lump sum of $30,000.

Workers with 10 to 26 years would receive $140,000 to leave, while workers with one to 10 years would receive $70,000. Both groups would receive a pension once they reached retirement age, but would not receive any health-care benefits.

Another program would pay workers with 26 to 29 years of service a monthly stipend of 42,750 until they are eligible for retirement, if they would leave now. The deadline for accepting the buyouts at GM and Delphi is June 23. Workers would have a week thereafter to change their minds.

According to an S&P report, the pension plan and post-retirement health-care obligations of the companies in the S&P 500-stock index were under-funded by $140 billion and $321 billion. Financial experts estimate that rising interest rates will help alleviate the pension plan under-funding problem, but rising health care costs will only exacerbate the post-retirement health care obligations.

More than 340 companies in the S&P 500 offer some form of traditional pension plans, of which 47 were actually over-funded. Only 22% of the post-retirement health-care obligations were even funded.

In New York City labor negotiations, the Bloomberg administration has proposed to the largest municipal union that newly hired workers a substantially smaller pension than the one that present employees are entitled to. The city's labor commissioner, James F. Hanley called for increasing the minimum retirement age for future District Council37 workers to age 62 from the current age of 57.

Commissioner Hanley also proposed requiring that future workers pay 3 per cent of their wages toward their pensions every year until retirement; current workers pay 3 per cent for only their first 10 years. Any pension changes that are made would require the approval of the New York State Legislature.

The commissioner also called for vesting to take place after 10 years instead of after 5 years, as is presently the case now. He also proposed a pension formula based on the last five years of earning rather than the last three years, as is now the case.

Thus we now see municipalities following in the footsteps of corporate American in calling upon its employees to "give back" some of the benefits that were claimed over the years. In the absence of changes the present system will drive many municipalities to bankruptcy in the future as their pension costs continue to escalate.

(6/5/06)- Judge Robert Drain of the U.S. Bankruptcy Court in Manhattan denied a request from GM for a 60-day delay in the proceedings so that the UAW, Delphi and GM could continue their negotiations still under the pressure of the bankruptcy hearings on the Delphi case. The judge denied the request saying that he wanted the parties to continue negotiating, but at the same time keep the pressure on all the parties.

The judge went on to say that, "people need to be assured there is some structure to the process."

Delphi has filed a motion with the court to void its union-labor contracts. See our item on this matter dated 4/1/06 below. The fear is that if the court voids the contracts it would cause the union to go on strike against Delphi. If the union goes on strike against Delphi, it in turn would create parts shortages for GM, which in turn would then come under the cloud of going bankrupt also.

Delphi sells about $14 billion a year inn car and truck components to GM.

(5/28/06)- According to the results of a survey that was conducted by the Kaiser Family Foundation, only one out of three big companies now provide health care coverage for their retirees, down from two-thirds in 1988.

In 2001, 22 million workers were covered by some sort of defined-benefit pension plans, 8 million less than in 1980, according to the Center for Retirement Research at Boston College. The number of workers in defined-contribution plans, like 401(k) plans jumped to 52 million, from 14.5 million over the same period of time.

(5/14/06)- The Energy Department has informed its contractors that it will no longer cover the costs of traditional pension plans for their new hires. Labor experts expressed the thought that other government agencies would follow suit. By traditional pension plans they mean plans that pay a set monthly amount for retirees based on length of service.

The DOE will begin to pay only the costs of defined contribution plans, such as 401(k)s, for new workers. The new policy is in line with the administration's general support for defined contribution plans over the more costly defined benefit plans.

(4/16/06)- There has been a great deal of publicity in the media recently about the rioting that has been going on in France because of the proposed new law that would enable employers to fire people under 26 with less than 2 years of seniority, but scant mention of the one day strike in England by municipal workers over the abandonment of the Rule of 85.

Ten unions in Britain that took part in the strike included those who collect the garbage, traffic wardens, meat inspectors, street cleaners and social service workers, among others.

Under the Rule of 85, local government employees could retire at age 60 on full pension, provided they have worked at least 25 years. Other public sector employees, such as civil servants, teachers, police officers, firemen and health care workers have had their pension plans protected, unlike members of the Local Government Pension Scheme, whose pensions are at issue.

Most of the affected workers are women whose salaries tend to be lower. The unions are arguing that the rule should continue to apply to current workers while being phased out for new employees.

(4/1/06)- Delphi Corporation, which is the nation's largest auto parts company filed an petition with the bankruptcy court on 3/31/05 to have all of its labor contracts abrogated. The bankruptcy court will appoint a referee to hear the company's claim and report back within 30 days as to his finding. The bankruptcy judge than has an additional 60 days to decide the matter.

The UAW, GM and Delphi have stated that they will continue to negotiatie during this period of time, so that an agreement on givebacks may be reached before the bankruptcy judge decides the matter. If the company unilaterally decides to impose the cutbacks the union has threatened to intiate a strike at Delphi.

Chrysler estimates that its average health care cost per salaried employee is $11,000. Each nonunion employee pays an average of $3,000 annually for health care coverage, with the company picking up the balance, or about 27%. Starting next year Chrysler salaried workers will pay an average of 31% of their health care coverage.

Executives will have to pay the entire amount of any increase in health care costs, which the company estimated would be about $1,500 more a year. Managers will pay an estimated $450 more a year, while administrative staff workers will not pay more.

Starting in 2007, managers who retire early will pay 50% of their post-retirement health care premiums, while executives will pay the entire cost. Workers who retire at age 65 would be offered a health savings account of $1,750 a year for a spouse or domestic partner.

An attorney from the law firm of Paul, Hastings, Janofsky & Walker LLP, representing Delta Air Lines told an arbitration hearing that was being held to see if the company could abandon its pension plan for about 6,000 of its pilots, that this was exactly what the company wanted to do. Up till then the company had not stated that it would abandon the plan for the pilots, who are the only unionized group of employees from the company.

Delta's plan has $1.89 billion is assets, but is funded only to 54% if its liabilities. The company filed for bankruptcy protection last September. From 2001 to 2005, $2.6 billion was withdrawn as lump-sum payments from the pilot-pension plan because of withdrawals from pilots who retired before reaching the mandatory retirement age of 60.

Delta is the third largest U.S. airline by passenger traffic. The company has offered to pay the pilots union a $330 million note, which would cover between 78% and 85% of the benefits the pilots, had under the plan.

The Labor Department is investigating whether Northwest Airlines systematically shortchanged it employee pension plans over a three-year period of time, and then did not make a $65 million contribution to the plan the day before the PBGC was obligated to take over the plan. Investigators are trying to determine if the company violated any laws in the steps leading up to the company's pension funds falling $5.8 billion short of its obligations.

Last fall, after the $10 billion collapse of the pension fund at United Airlines, the Labor Department agreed to coordinate with the IRS on enforcing the pension law's minimum funding requirements. Northwest received a waiver from the IRS in 2003, allowing the company to reschedule that year's pension contribution over 5 years. The company sought the same treatment for its payments due in 2004 and 2005.

The pension bill now being negotiated in a House-Senate conference committee is attempting to deal with a version that would allow the airline industry to extend its required payments to the pension funds by 20 years. The president has indicated that he would not approve such an extension for any industry that favors it over the rest of the industries in this country.

(3/17/06)- GM announced that it would stop accruing benefits under its current formula for the defined-benefits plan for its salaried employees who were hired before January 1, 2001. Salaried employees who were hired after January 1, 2001, who currently take part in a type of retirement program called a cash-balance plan, will stop accruing cash benefits. They would be paid instead a modified pension based on 1.25 times their monthly earnings for future years of service.

GM will make a contribution to their 401(k) plans, equal to 4% of their annual base salary. The cash they will have contributed will continue to earn interest. The benefits of GM's retired salaried workers are not affected or retired members of the UAW.

The freeze on its defined-benefits plans will affect about 42,000 of its workers in the U.S. The company also said it was freezing benefits that its executives had accrued under their supplemental pension plan. Beginning January 1, 2007, GM said it would provide a 50% match for salaried employees 401(k) contributions up to 4% of their pay.

GM's pension liability for 2004 was $89 billion, and the company does not know the figure yet for what its 2005 liability came to. The freeze is expected to save the company's pension costs by $1.6 billion this year.

(3/8/06)- A new Standard & Poor's Corp. analysis estimates that states' pension plans are under-funded by about $284 billion nationwide, as of 2004, the latest year for which data are available. As of June 30, 2004, the value of public pension fund assets fell to 84% of projected liabilities, from 100% or more in the late 1990s.

Among the most under-funded plans were those in West Virginia, Oklahoma and Rhode Island. State and local governments will have to start setting aside money to pay for retiree health benefits as a result of pending accounting changes. For the first time municipalities will have to disclose the amount of their health care liabilities, as will corporate America.

At last estimate the states are already staggering under a $288 billion debt load, so the situation will only continue to deteriorate down the road.

(2/25/06)- Delphi Corporation, which is the nation's largest auto parts company has set a new deadline of March 31 for its talks with its unions and General Motors to reach a deal to lower its wages and benefits for its employees. Delphi was a subdivision of GM until 1999, when it was spun off as an independent company. About 4,000 workers at Delphi have the right under the old union contract to return to GM if there are jobs available for them. GM has estimated that Delphi's bankruptcy could cost it up to $12 billion.

Companies operating in bankruptcy can ask the bankruptcy judge to set aside their labor wage, health benefits and pension contracts and impose less-generous terms, if they can prove that the company's ability to operate is jeopardized by the existing contracts. If the two sides in the matter can not negotiate the bankruptcy judge can impose new terms for the agreement within 60 days after being requested to do so by either of the parties to the matter.

Thus if there is no deal by March 31, the bankruptcy judge has until May 31 to rule on the matter. The UAW has threatened to strike if the terms of the new agreement are too onerous as far as they are concerned. A strike would have serious implications for GM since Delphi is their largest auto parts supplier.

(2/19/06)- The Delta Air Line Pilot Association, with 6,000 members and the company are negotiating in connection with the termination of the employee pension plan, as part of the company's bankruptcy reorganization. The company has offered the union a $300 million interest-bearing note to abandon the plan, while the union is asking for $1 billion to abandon the plan.

Under the bankruptcy law, a company can abandon its pension plan, and turn it over to the PBGC if it can prove to the bankruptcy judge that it can not fund the plan. The union and the company agreed last year to seek arbitration if a new contract was not reached by March 1. The pilots have threatened to strike if the arbitration panel allowed the company to void their contract.

According to the PBGC, the Delta pension plans are under-funded by $10.6 billion. Northwest Airlines is seeking bankruptcy court permission to scrap its contracts with its employees, and also to abandon its pension plans with them. Its union members are also threatening to strike if the court allows the drastic cuts being requested by the company.

GM announced that it would cap health-care expenditures for all salaried retirees and their families at the 2006 level. Recently the North American arm of the Japanese auto maker Nissan Motor Co., announced that it would limit its share of retiree health care costs to $2,500 a year, plus a 3 % annual allowance for inflation.

According to a 2002 Medicare survey, about 14.7 million Medicare beneficiaries also had employer-sponsored coverage, including 2.1 million who were still working. Those people generally rely on Medicare for basis coverage, and employer subsidized Medigap insurance to cover some of the costs not covered by Medicare. Of course the new prescription drug coverage law for Medicare beneficiaries will pick up some of that cost now.

According to the Employee Benefit Research Institute, a Washington based research firm, 42.4% of the private-sector workers 21 or older lacked any retirement plan at work, up from 38.5% in 1999.

(1/25/06)- Alcoa Inc. said that it would eliminate its defined-benefit pension plan for most salaried new employees beginning March 1. Aon Corp. and NCR Corp. also made similar announcements recently. Please keep in mind that this differs from the freezing of the pension plans as we discuss in the item dated 1/10/06 below in connection with IBM.

The company, which is based in Pittsburgh, has 48,000 U.S. employees. It will make a contribution of 3% of an employee's annual salary and bonus to the retirement plan for that individual, and it would also match the first ^5 of salary that an employee contributes to the plan. The change will not have any affect on current employees.

A master contract with the United Steelworkers of America covering 9,000 Alcoa workers expires at the end of May.

(1/10/06)- The Employee Benefit Research Institute, a non-partisan research center located in Washington, estimates that about 48 million full-time employees receive no pension benefits, and their companies offer no retirement-savings plans. This figure represents about 45% of the private-sector work force.

IBM announced that it would freeze pension benefits for its American employees starting in 2008, and offer them only 401(k)-retirement plan options in the future. Verizon, Hewlett-Packard, Motorola and Sears are just a few of the companies that have gone this route recently as corporate America retrenches on the benefits available to their workers.

Beginning in the year 2008, the retirement benefits of the 117,000 IBM employees currently participating in its U.S. pension plans will stop building in value. Employees can take that money out when they leave the company or if they retire. They will not however receive any credits in the plan for the additional years they work for the company past 2008. The company's present 125,000 retirees, and its former employees, will not be affected by the move.

The company said it would reduce its retirement-related expenses by $450 million to $500 million in 2006, and by $2.5 billion to $3 billion in the period 2006 to 2010. IBM has the 3^rd largest corporate pension plan in this country with about $48 billion in assets. The company indicated that it would make a similar change to its international plan as well. The company said it had about $79 billion in its worldwide plan.

IBM had previously closed its pension plan to new employees at the end of 2004. The company said it would increase the amount it contributes to its workers 401(k) plans. In addition to the automatic contribution that the company makes, it will also match employees' contributions dollar for dollar up to 5% to 6% of their pay, depending on the worker's hiring date. Most companies provide no more than 50 cents on the dollar in matching funds.

GM has the largest corporate pension fund, and it has not announced any intention to freeze it plans. GE has the 2^nd largest pension plan fund in the U.S., and it also has not announced any intention to change its plan yet.

The lawsuit that was brought against IBM by some of its employees when the company changed from a defined benefits to a cash-balance plan because the change over discriminated against older employees in still pending in the court system. IBM is appealing the lower courts ruling that such a changeover was discriminatory.

(1/6/06)-A ruling issued by the U.S. District Court for Eastern Michigan will require ArvinMeritor, an auto supply company to reinstate all health benefits for its workers who are UAW retirees to the levels that they were at, before the company made cuts in them this year and in 2003. The company said it would appeal the ruling.

The company had announced in August 2004 that as of 2006 it would eliminate health care benefits that supplement federal Medicare coverage for its retirees 65 or older. Three class action suits were filed against the company's changes in retiree benefits, alleging that this violated agreements between the UAW along with the United Steel Workers union and Arvin at plants that have been closed or sold.

(12/28/05)- New rules promulgated by the Financial Accounting Standards Board (FASB) will take effect in January that will require both corporate and municipal employers to show on their balance sheets the degree to which their pension health-care (including retirees)and other benefit plans are over-or under-funded. Up till now these numbers showed in footnotes on the financial statements, but now they will be in a place where more people will be paying attention to them

This means that health-care coverage liabilities for retirees will be on the books for all to see. S&P estimates that these other benefit liabilities will show that the plans at the S&P 500 companies are under-funded to the tune of $292 billion, which is nearly double the estimated shortfall in the same companies' pension plans.

While the S&P 500 companies have funded 88% of their pension obligations, they've only funded less than 22% of their expected other bills for post-employment benefit plans. The immediate effect will be to cut shareholder equity, but it could complicate the lending agreements for many of these companies that may now become in default on some of their loan provisions because of the increase of debt on the balance sheet.

According to figures from the Citizens Budget Commission, a non-partisan group that analyzes city and state finances, only 38% of companies with more than 200 workers offered retiree health insurance as of 2005.

Hourly workers at Ford narrowly approved an agreement that would require hourly workers and retirees to pay more for their health care. GM workers approved a similar agreement but by a wider margin

Judge Robert H. Cleland of the Federal District Court in Detroit approved the GM deal and said that formal notices should be sent to retirees and surviving spouses. He scheduled a March 6 hearing on the fairness of the agreement. The court must approve all changes involving retirees at GM.

Under the agreements, retired autoworkers would start paying monthly contributions, annual deductibles and co-payments for some medical services, up to a maximum of $370 a year for individuals, and $752 for a family. They do not pay such fees now. The agreements also increase the cost of prescription drugs, and institute a $50 emergency fee for retirees.

(12/21/05)- General Motors Corporation announced that it was freezing contributions to its 401(k) plan for white-collar workers and reducing severance benefits. A GM spokesman, Robert Herta said the company would stop paying its standard 20 cents for each $1 that salaried workers invest in the company's savings plan. GM had cut its contribution from 50 cents to 20 cents in April.

Echoing the agreement that the United Auto Workers union had hammered out with GM, local auto union officials at Ford Motor Company approved the company's demands for lower annual health care costs at that company. Active workers at Ford will divert 99 cents an hour in future wage increases to a health fund, while retirees will pay as much as $752 a year per family for medical coverage. Workers at Ford must vote to approve the changes.

Ford pays health expenses for 550,000 active and retired workers and dependents in the United States. Employee's annual deductibles will rise as much as 33% effective June 1, 2006. The company would limit its health care contribution for retired salaried employees to the average 2006 level, with the retirees paying any increases starting in 2007. At the same time the company also announced it would increase the pay an average 3% for salaried workers in 2006.

(12/18/05)- Verizon Communications Inc. announced that about 50,000 of its mid level managers would stop earning pension credits after June 30, 2006. Managers hired after the start of this year will receive no pension benefits at all. Managers who have been with the company less than 13 1/2 years also will no longer receive subsidized retiree medical benefits. Changes to the plan would not affect current retirees, and employees would retain pension benefits that they have already earned.

To compensate employees for these losses, the company announced that it would increase its contribution to managers' 401(k) plans. The company would contribute less to the health care benefits of the managers when they retire.

The changes will bring the company's managers more in line with the pension benefits given to the 53,000 workers at Verizon Wireless, the company's mobile phone subsidiary, which is not unionized.

Freezing a pension plan is not the same as terminating the plan. When a company terminates a plan, it usually pays an insurance company a big up-front premium to take over the plan entirely. That takes the plan off the company's books entirely, ending forever the company's obligation for financing it. Going into bankruptcy and having the PBGC take over a plan is another situation also.

When a company freezes a plan as Verizon is doing, it stops the workers from earning any new benefits but keeps control over the plan itself, putting in more money as needed as workers retire and claim benefits. Assumed pension investment earning can be included into corporate income each year. Once a plan has been frozen does not mean it cannot be unfrozen at a later. Date.

(12/2/05)- Under a new accounting rule, which will affect most local, state and federal governments starting in fiscal 2008, they must starting recognizing their long-term obligations to pay for retirees' health-benefits. They will be required to publicly disclose what it would cost each year to fund that liability. In other words the governments will face the same problem that many corporations are now encountering, namely a much greater liability for health-care benefits.

While corporations can negotiate with their employees to help reduce the costs to the government for those benefits, municipalities will have to go to their legislative bodies in order to be able to change those benefits.

The new rule does not require governments to set aside any money to fund the long-term obligations, only to report what the amount of those obligations comes to. Incidentally, governments are not part of the Public Benefits Guaranty Corporation (PBGC) and thus do not contribute any money to the agency for its employees on a monthly basis.

In a study that was conducted by the Government Accounting Office (GAO) of 133 pension plans that were converted from defined-benefits to cash-balance plans, it was concluded that most workers-regardless of age-received lower retirement benefits as a result of the conversion.

Using a simulated model of 100,000 participants, the study found that older workers experienced the greatest decline in pension benefits. The report from the GAO had been requested by Reps. George Miller (D.-CA.) and Bernie Sanders (I.-Vt.) and Senator Tom Harkin (D.-Io.) who are backing legislation that would require employers to protect workers' pensions during conversion to cash-balance plans.

The study is the most extensive independent study to compare typical pension plans to typical cash-balance plans, based on actual plan data from the Internal Revenue Service. The report went on to criticize the "wearaway" effect of the conversion which causes older employees to receive no increase in their pension benefits for many months after the conversion takes place.

(11/14/05)- The Financial Accounting Standards Board approved its staff's recommendation to revise pension plan rules in two stages.Under the first stage, companies would be required to show on their balance sheets as an asset or a liability the amounts by which their pension plans are over or under-funded. Up till now this number has been shown in the footnotes in the company's financial statements.

Under the second stage, the board would reconsider all elements of the current pension-accounting system, and this will be done as part of a joint project with the London based International Accounting Standards Board. The actual steps for this second stage will be placed in the background for the next several years.

Under stage one, companies would not be required to include the pension-related assets and liabilities themselves on their balance sheets-only the net difference. The new balance sheet item would represent the difference between the "fair value" of companies' pension plan assets and the estimated amount of their plans' future obligations to employees.

The SEC is probing the assumptions that are being used in determining what large companies' liabilities will be to the present and future retirees. The SEC is referring to these assumptions as "reverse engineering." Many of the assumptions that are being challenged appear in the companies' financial statements. The SEC wants to determine whether or not those assumptions were made in good faith, or if the companies wanted certain results first and then made the assumptions to help them get those results.

Here are the three areas the SEC is looking at:

• Discount rate: Companies use discount rates to figure out the present value of things they need to pay in the future. A dollar today will be worth less several years down the road. How much less? To place a current value on future pension payments, companies look at the prevailing interest rates for high-grade corporate bonds. The higher the discount rate, the lower the current value of the future liability-and the better funded a plan would appear.
• Expected rate of return: Companies can use an expected rate of return for what their pension funds will earn. If actual returns turn out to be greater, or lower, than the expected rate of return, the effects are filtered into the annual pension expense over a period of years.
• Health care inflation: In order to be able to estimate what a company's liability for health-care benefits will be to current and future retirees, companies must estimate the rate for health care costs down the road. Companies are supposed to take into account their recent experience and trends, and not just pick a desired amount.

By a partisan vote of 23-17 the House Ways and Means Committee approved legislation that changes pension -funding rules, but now must resolve the differences between their bill and one that was recently passed by the House Education and Workforce Committee. Ways and Means Committee Chairman Bill Thomas (R. -CA.) said the bill would require companies to fully fund their pension plans and to make up shortfalls in funding quicker.

The proposed bill would increase the amount of annual premiums that were paid to the PBGC to $30 per worker from it present premium of $19 per worker. The bill would also create a new termination premium totaling $3,750 a covered worker for companies that shift their pension plan obligations to the PBGC. Please keep in mind that in order to shift the obligation to the PBGC the company would have to be in bankruptcy.

The U.A.W. announced that GM workers had voted to accept the benefits cut agreement that the union reached with the company recently. Sixty one percent of the workers voted in favor of approving the settlement. A federal judge must approve the settlement, since the company's retirees who are affected by the settlement did not have a vote on it.

Under the new plan, GM retirees will, for the first time, have to pay deductibles and monthly premiums for their coverage. The co-payment amount will be increased for prescription drugs, and active GM workers will forgo a raise of $1 an hour in 2006 to help offset the cost of retiree health care.

(10/24/05)- In an unusual move the UAW and two of its retiree members are suing GM to prevent the settlement that was recently reached between the union and GM from going into effect. The suit, the UAW v. GM was filed in the Eastern District of Michigan.

The Sixth Circuit Appeals Court ruled in 1998 that even though GM advised prospective retirees that health care coverage would be provided "at GM's expense for your lifetime," a clause in the plan summary noted that GM "reserved the right to alter the benefits". There is also some past legal precedent that defines "lifetime" as meaning the lifetime of the contract, not the lifetime of the retiree. This matter is expected to reach the Supreme Court because of the fact that state courts have given varying interpretations to this clause.

Normally the law does not allow a union to negotiate to reduce the benefits for people who are already retired. The law does not allow employers to unilaterally cut benefits for those who have retired under negotiated union contracts. In its filing, the UAW is asking the court to settle the matter by approving the tentative agreement. This would allow the union to negotiate a reduction in benefits, without negating the union's legal position that the benefits that were bargained for in previous contracts are "lifetime" benefits and unchangeable.

Retirees of Walt Disney Co. sought a similar declaration from the court in the late 1990s, and even though that case was fully litigated, a settlement was arrived at before the case was decided. About two-thirds of the large employers in this country still provide health-care coverage for retirees, but the co-pays and premiums being paid by the retirees are increasing sharply. As long as the contract has a "reservation of rights" clause language in it, the employer has a strong argument for changing the terms of the agreement.

The new Medicare prescription law that goes into effect on January 1, 2006 has a clause wherein the employers are reimbursed for 28% of the cost of retiree prescription drug spending over $250, up to $1,330 per retiree per year, tax free. This clause was inserted into the new law to encourage employers to maintain coverage in their plans for retirees. The law allows employers to count retiree contributions towards the total that qualifies for the subsidy. GM will cut $4.1 billion in retiree liabilities from its books as its share of the subsidy over time.

GM local union leaders voted to approve the terms of the settlement with the company and now it will be up to the individual members of the union to vote on the proposed settlement. GM retirees can not vote in the approval process. GM retirees will have to pay deductibles, monthly premiums and co-payments for the first time if the settlement is approved by the membership. A retired individual GM worker could pay as much as $370 a year for traditional coverage, while a retired family could pay as much as $752. Co-payments for brand-name prescription drugs will increase to $10 from $5.

Under the proposed renegotiated contract GM's active workers will be asked to give up $1 an hour starting in 2006 by deferring cost-of-living adjustments and planned wage increases. That money will go into a fund that will be created to help pay retiree medical costs. GM will contribute $3 billion to the fund by 2011. The proposed agreement for retirees would not subject older retirees with pension incomes of $8,000 or less to the new rates.In December 2006 an additional two cents of hourly compensation every quarter will flow into the fund. It will take about 6 months before the agreement can be fully implemented.

U.S. Federal Court Bankruptcy Judge Prudence Carter Beatty in New York refused to order Delta Air Lines to make an October contribution for its pilot's pension plan. The airline intends to skip the contribution of $160 million to preserve cash. The judge also allowed the airline to proceed with its plans to return dozens of aircraft to leaseholders. She did not rule out forcing Delta to pay later, but said it was too premature to compel the payments now.

Pittsburgh Brewing Co., an ongoing concern sought to terminate its under-funded pension plan and have its obligations assumed by the PBGC. In a letter written to the PBGC the company told the agency that it has lost $1.2 million from operations over the last three years, despite $1 million in cost reductions and forbearance by creditors.

The letter went on to state that lenders have balked at advancing $1.5 million in funding for the brewery to replace a 65-year old boiler because of the status of the company's under-funded pension. The plan is under-funded by $12 million, and covers 530 current and former employers.

(10/18/05)- GM and the UAW announced that they had come to an agreement in regards to the give-backs and cutbacks that the employees of the company would accept in regards to health-care benefit costs and pensions for retirees' costs. The agreement has to be ratified by the union members before it can become effective.

If the system at GM were not changed the company would be forced into bankruptcy sooner or later. There simply are not enough active workers at the company to pay for the benefits for one; and for two, the health-care costs continue to grow astronomically.

We will post the items involved in the agreement later this week, but we at therubins would like to discuss the implications of the agreement today. In reality what the agreement means is that defined-benefit pension plans are a thing of the past. The Supreme Court will have to ultimately decide whether or not the switching of these plans to cash-balance type plans is legal or is discriminatory to the older employees.

The switching to 401(k)-type pension plans over defined-benefit plans is inevitable now. Retirees will have to bear much more of the cost for their health care and prescription drug treatments.

The issue that will now come to the forefront is the issue of privatization of Social Security. The pressure will grow for individuals to have their own investment selections rather than having Social Security handle the investment decisions. Those who favor this idea feel that the individual can manage his or her investments better than the government can do it. The Social Security and Medicare system will go bankrupt down the road unless changes are made now to solidify their financial stability. The longer we wait to make those changes, the more costly it will be.

The particulars of this switch will have to be hammered out by Congress over the coming years. We have no idea how it will be resolved. Protections must be built into whatever changes are to occur, so that no elderly person in this country will be forced to live on a subsistence level because of the poor investment decisions made by those who handle his or her account.

Lockheed Martin Corp. announced that all new and rehired employees would no longer be eligible for its defined benefits plan, but would instead have defined contribution plans. This is another trend that corporate America has embarked upon in the last few years. In many cased the defined benefits plan have been switched over to cash-balance plans in determining the pension benefits that eligible members will earn upon their retirement.

The new program will apply to new and rehired employees starting January 1, 2006. The $23 billion plan is one of the largest defined benefit plans in this country. About 85,000 of the company's 130,000 employees participate in the defined benefits plan.

Under the new plan, Lockheed will contribute 3% to 6% of the employee's salary on a tax-deferred basis, and will increase vacation for new hires to three weeks from two. It will eliminate subsidized retiree medical benefits.

(10/15/05)- GM officials indicated that the company may act shortly to unilaterally cut back health-care and pension costs for its workers, their families and retirees unless the UAW agreed to a deal on these matters before the end of the month. The contract between the company and its union does not expire until 2007. GM has stated that its annual U.S. health-care bill for employees and their families and retirees came to over $5.6 billion in 2004.

If there is agreement between the two sides it is likely that both premium and deductible increases will be included in the package. The package as far as it deals with retiree's benefits is still too early to call. As corporate America calls for givebacks from its unions will older Americans have a disproportionate amount of the burden to bear?

GM management has indicated in the last few weeks that it is seeking at least a $1 billion in cuts in these costs on a yearly basis. Some legal experts feel that the company is not legally obligated to provide the same benefits for its retirees as it does for active workers. The company is due to announce its quarterly earnings report on Monday, October 17th. Many financial experts are expecting the company to continue to show substantial loses.

Meanwhile Delphi Corp.'s chairman and chief executive officer Robert S. "Steve" Miller said that the company would meet with its union on October 21 in the hopes of hammering out a new labor contract for its 45,000 workers and retirees by early next year. The company filed for Chapter 11 bankruptcy earlier this month and is seeking extensive give backs on wages, pensions and retiree benefits from its union

Delphi estimated that its filing is the 13^th-largest in U.S. history in terms of assets. The company has 185,000 employees worldwide. Mr. Miller said that the company wouldn't make a decision to terminate its pension fund for "at least six months." He also stated that the company would not make a $1 billion pension payment due early next year. He estimated that the company's pension plan was under-funded by about $5 billion. In other words the PBGC will be left holding the bag for another substantial amount in addition to its recent additions of the airline pension plans that are under-funded with the companies being in bankruptcy.

(10/14/05)- Two years ago Congress relaxed pension rules to give companies some breathing room with their pension obligations. That extension is due to expire at the end of December. Senate leaders are trying to reach an agreement on a bill that would permanently tighten these rules, but several issues have arisen in connection with the proposed bill. There is a provision in the bill that would give special relief to the airline industry as a whole, and more specifically to Northwest Airlines.

Two senators-Mike DeWine, Republican of Ohio, and Barbara A. Mikulski, Democrat of Maryland-were holding up action on the bill to demand deletion of sections requiring tougher pension financing rules for companies with falling credit ratings. Ms. Mikulski said poor credit ratings did not always reflect how well a company's pension plan was funded. If you make things more difficult for companies with low credit ratings, you may in fact be forcing them to go into bankruptcy, and thus divest themselves of their pension obligations. Some financial experts estimate that the amount that pensions are under-funded could exceed $450 billion.

The GM pension funds are a prime example of how difficult it is to even estimate if a company's pension funds are under-funded or not. The PBGC contends that GM''s pension plans are under-funded by $31 billion, whereas the company claims that its pension plans are "fully funded". Strangely enough both methods of evaluating the health of a pension fund are legally acceptable.

GM's pension funds are the largest in American industry, covering more than 600,000 workers, retirees and surviving spouses. The difference between the PBGC's estimate and GM's estimate is a result of the assumptions made about how long the company would keep operating the pension funds. The federal agency's estimate was made on what is called the "termination basis". If GM were to terminate its plan immediately the shortfall would be $31 billion. If, as the company contends, it does not terminate its plan immediately they have $91 billion in assets, with only $89 billion in benefits owed, so in fact it has a surplus of $2 billion.

Since 1994, companies with weak pension funds have been required by law to calculate the value of their pension funds on a termination basis, and to send that information to the agency. The law requires that this information can not be revealed by the agency. In the case of GM however the agency made its own independent analysis to come up with the $31 billion estimate. The agency had to reveal that information in response to a request under the Freedom of Information Act.

Representative John Boehner (Rep.-Oh.) who is chairman of the House Education and Workforce Committee went on record to state, "This is not good public policy" in referring to the fact that the bill gives special treatment to one industry over all other industries in this country.

The proposed Senate bill would require companies to bring their pension funds to full solvency over seven years. Companies that had their credit ratings fall to junk level would have to compute their pension obligations to take into account any lump-sum distributions that it would have to make, or any early retirement programs that could accelerate payments to workers. These revised computations would have to be dealt with in order to bring the company's plan to solvency within the newly designated 7- year time frame.

Under the proposed bill companies that make contributions to their plans that are above the required yearly minimum amount would have to mark to the market the value of these contributions. Under the present law these contributions could be computed at the value they were when the contribution was first made.

The minimum rate of contribution to the PBGC would be increased from its present rate of $19 per year per employee to $30 a year per employee.

Under the proposed bill an exception would be made for the airline industry. Airlines would have 14 years to bring their plans to complete solvency instead of the 7-year period of time designated for other industries. In addition, airlines would be allowed to calculate the total value of the pensions they have promised to their workers in a way that assumes their investments would continue to achieve the same average returns that they did in the last decade. This assumption is a highly questionable one, as we have all seen in the fluctuations of the stock market over the last few years.

(9/27/05)- Corporate America continues to take advantage of its retirees by cutting back on promised retiree health care benefits, or by sharply increasing the premiums that retirees must pay for these benefits. It remains to be seen how many corporations will take advantage of the new prescription drug coverage plan for Medicare beneficiaries when it goes into effect on January 1, 2006 by cutting back or even eliminating prescription drug coverage for its retirees.

The latest company to do this was Sears Holding Corp that is based in Hoffman Estates Illinois. This is the company that resulted from the merger of Sears, Roebuck & Co. and Kmart Holding Corp. Its total operating income for the year 2004 was $487 million. The company has been cutting back on its post-retirement benefits for the last few years.

Sears' post-retirement benefits, which include both medical and life insurance benefits, added $50 million to the company's operating income last year by cutting its costs for its retirees benefits. In 2003 the company added $65 million by cutting back on these costs, and it added $60 million to operating income in 2002 by these cutbacks also. A quirk in the accounting regulations allows this to take place.

The company announced that it would no longer pay anything toward the coverage of its retirees who were younger than 65 at the time of their retirement. About 6,700 of Sears' retirees fall within this category. There are about a total of 45,000 Sears retirees who are covered by the company's retirement benefit plans.

Retirees who are older than 65, and who retired before Jan. 1, 2000, will continue to receive payments from the company for medical benefits, but the payments will be smaller than in past years. The change will take effect on January 1,2006.

(9/20/05)- Delta Airlines and Northwest Airlines became the 6^th and 7^th U.S.airlines to file for bankruptcy. The petitions, which were filed in the U.S. Bankruptcy Court in New York, meant that the number 3 and number 4 U.S. airlines respectively by passenger traffic were now operating under the protection of the bankruptcy court.

The filing by Northwest took place on the day before the federal government would have become a secured creditor for $65 million. The timing of the Northwest filing illuminates a weakness in the 31- year-old federal pension law. In making the filing for bankruptcy protection the day before the payment was due to be made to its pension plans, the bankruptcy law will prevail.

Thus the Pensions Benefit Guaranty Corporation (PBGC) will be left holding the bag once again. The agency will not be able to place a priority lien against the assets of Northwest. Unsecured creditors generally do poorly in bankruptcy proceedings. Northwest has a total of $9.2 billion in pension obligations as of the end of 2004, and assets of just $5.4 billion.

Delta says that its pension plans are underfunded by $5.3 billion. The PBGC has estimated however that Delta has $8.4 billion in underfunded liabilities. There is legislation pending in Congress that will give the airline industry 14 years to amortize their pension underfunding, up from the 7 years that other companies would have.

As of the latest count the PBGC had an estimated $23.3 billion in unfunded liabilities as of last year. The agency guarantees up to $45,614 for each employee who retires at age 65. The $23.3 billion shortfall was about double the 2003 amount, and as we can see from the above this amount continues to soar.

 (9/1/05)- The Pensions Benefit Guaranty Corporation (PBGC) and US Airways Group have come to an agreement to resolve the nearly $2.7 billion in claims in the bankruptcy court which will ensure the agency's support for the airline's reorganization plan. The agency will assume responsibility for the airlines pensions plans covering 51,000 employees, including flight attendants and machinists. The agency had already assumed responsibility for the airline's pilots pension plan.

The bankruptcy court must still approve the settlement. Under the agreement the agency will receive a $13.5 million cash payment, a $10 million note and 70% of the stock given to the unsecured creditors of the airline. The agency agreed not to participate in a potential stock offering to US Airways' creditors as contemplated in the company's Chapter 11 plan. The PBGC also agreed not to sell its shares in the reorganized company for at least 5 months.

With 5 airline companies now in the bankruptcy court the burden continues to grow on the PBGC.

(8/18/05)- The Senate Finance Committee approved legislation that would require companies to fully fund their defined-benefits pension plans, while at the same time allowing airlines 14 years to fully fund their pension obligations. The Senate Committee on Health, Education, Labor and Pensions is also holding hearings on the same matter. The House Ways and Means Committee is handling the matter in the House.

Other than the airline industry, the rest of the 29,651 companies that offer defined-benefit plans would have seven years to catch up on any under-funded pension obligations. The temporary solution that dealt with under-funded pension that was passed by Congress two years ago is due to expire at the end of this year. The CBO estimates that there are about 34.6 million Americans covered under defined-benefit plans.

(8/5/05)-Hewlett-Packard has joined the growing rank of big corporations that are "freezing" their pension plans to exclude new employees or workers under the age of 40. Most of these same corporations are offering expanded 401(k) plans to compensate the workers for the lost benefit.

In its announcement freezing its pension plan benefits Hewlett starting next year, the company said that its workers whose combined age and tenure equal a minimum of 62 will keep their pension benefits intact. Everyone else will lose the potential for further accruals, but will retain the benefits already accrued.

Companies that have taken similar actions in recent years include NCR Corp., Sears Holding Corp., IBM and Motorola Inc. NCR froze pension benefits for workers under the age of 40 beginning in September 2004, and stopped offering its plan to new hires. Sears also stopped benefits for new workers and current employees under age 40 in 2004, but then resumed the plan after its merger with Kmart. Sears recently announced that it would freeze plan benefits for all employees beginning in 2006.

IBM and Motorola shut their defined-benefit plans to new workers at the start of 2005. Over two hundred companies changed their defined-benefit plans to cash-balance plans but the legality of this move has come into question. A federal district court judge in 2003 ruled that IBM had discriminated against older employees when it converted to a cash-balance plan in 1999. IBM settled a portion of the case for $320 million,, and is expected to appeal the age-discrimination claim later this year.

Two employees of Southern California Edison Co., have filed a suit in federal district court in Los Angeles alleging that the utility discriminated against older workers when it converted it traditional pension to a "cash-balance" plan in 1998. This is the first pension conversion suit alleging age discrimination to be filed since the Supreme Court decision in March that made it easier for older workers to bring cases alleging that the conversion from defined-benefits to cash-balance plans discriminated against older workers in favor of younger workers..

(7/8/05)- GM has roughly 111,000 workers today as opposed to the half a million workers that it had in the late 1970's. The company announced recently that it intends to cut another 25,000 workers from its payroll in the next year. The company has about 2 1/2 retirees for every active worker. In 2004, retirees accounted for about 70% of the company's total health care costs of about $5.2 billion.

Retirees of GM make co-payments for visits to the doctor, and a $5 co-payment for each prescription that they order. According to a recent report from Sanford C. Bernstein & Co., an investment and research company, about 40% of U.S. companies with more than 5,000 employees offer no retiree health benefits. Of those companies that are continuing to offer their retirees health benefits the premiums continue to rise far above the rate of inflation.

(7/3/05)- The Pension Benefits Guaranty Agency (PBGC) has now assumed the 2^nd of the four pension plans at United Airlines whose parent, UAL Corp. filed a new plan to emerge from bankruptcy in the fall of this year. This plan covered salaried, management and customer-service workers at United. The PBGC has already taken over the pension plan covering active and retired mechanics and ramp workers. A third plan that covers pilots will be covered as soon as the company and the union finish litigation concerning the termination date of that plan.

The fourth plan, which covers15,100 active workers, 5,100 retirees and 8,500 working at different companies is also in default. The Association of Flight Attendants (AFA), who threaten to strike if the agency takes over that plan, are covered under that plan. According to Sara Nelson Dela Cruz, a spokeswoman for the AFGA, "But we've said all along that the termination of the pension plan changes our contract and gives us the right to strike."

AFA's request for a preliminary injunction against the PBGC was denied by a federal judge in Washington, D.C., and is now on appeal.

(6/26/05) - The U.S. House of Representatives attached a provision to a government spending bill that would block United Airlines from defaulting on its pension plans and shifting them to the PBGC. The bill must pass the Senate before it could take effect. The agency does not spend government-appropriated funds so its effect may be very limited. The PBGC has already taken over one of the company's defined-benefit pension funds. The PBGC is funded through premiums collected from employers whose plans are covered by the agency.

The UAL and the leaders of its International Association of Machinists and Aerospace Workers have worked out a tentative new 5-year contract which the union's members must ratify by July 22. The union represents 20,000 active United employees who work in baggage handling, public contact, security and other areas.

Under the tentative deal, UAL's machinist union members would be able to participate in the union's fully funded pension plan covering 65,000 beneficiaries at 1,700 US companies. If the deal is approved the machinists may join the pension plan starting March 1, 2006. At that time United would begin making contributions equal to 4% of employee earnings. The contribution rises to 5% in 2007 and to 6% in 2008 and 6.5% in 2009.

The tentative agreement cuts workers wages, reduces the number of paid holidays to 8 from 10, reduces vacation time and increases the company's ability to utilize part time workers. It also reduces pay for sick leave.

(6/16/05)- Bradley D. Pelt, executive director of the PBGC testified before the Senate Finance Committee that the agency tracks the number and condition of plans with shortfalls of at least $50 million as a rough indicator of where the greatest risks to the pension insurance program lie.

As of April 15, the total pension shortfall among this group of companies was $353.7 billion, an increase of 27% since April 2004. The number of companies with such shortfalls grew from 1,051 to 1,108. According to a study done by the General Accountability Office more than half of the nation's biggest companies with pension plans have not put any cash into their defined-benefit pension plans for several years now. The GAO did not identify any of the corporations in its study.

(6/05)- The Congressional Budget Office's latest estimate for the PBGC deficit is that it will grow to $71 billion in the next decade. In testifying before the House Budget Committee, CBO Director Douglas Holz-Eakin said that because of the growing PBGC deficit in the next decade, it would require that the premium would require a five-fold increase to wipe it out. Obviously such an increase is politically and economically unfeasible since it would force many marginal companies into bankruptcy. This in turn would mean the PBGC would have to take over many more defined-benefit pension plans.

(6/11/05)- The curtain is about to rise in connection with several of the most important labor-management contract issues of our time. The contract that we are referring to is the one between the UAW and GM that is not due to expire until 2007. GM asserts that about $1,500 of cost structure is built into every car that it produces as a result of its health-benefit and retiree pension costs.

The UAW asserts that it currently has about 500,000 members who are retirees, while there are only about 622,000 active members in the union working for the auto industry. The union's leaders and the leaders of the local unions met recently to discuss what there course of action would be, when they meet with GM executives later this summer.

Chuck Rogers, president of Local 735 at GM's Ypsilanti, Mich., transmission plant stated after the meeting: "We are willing to continue to work with GM on the health-care problem." Al Coven, president of the local at Delphi's Saginaw steering plant said: "We can help them or we can decide not to help. We're not stupid. We're going to help them."

The health-care coverage GM currently offers hourly retirees is more generous than the coverage it offers white-collar retirees and the coverage of many comparable large companies offer their retirees. GM's UAW retirees pay no premiums, compared with monthly premiums of $75 paid by GM's white-collar retirees.

(6/6/06)- The deficit problems for the PBGC continue to worsen with the passage of time. The problem is now being compounded by the fact that not only are the single company defined benefit plans for companies that are going into bankruptcy being dumped onto the shoulders of the agency, it looks like the same problem is evolving from multi-employer plans as well.

Multi-employer plans were set up so that workers who move from company to company within a unionized industry could maintain their retirement benefits which are negotiated under a common union contract. A total of 1,600 multi-employer plans are paid for by 65,000 mostly small companies with 10 million unionized workers in such industries as trucking, construction and grocery store chains.

UPS, which participates in 22 multi-employer pension plans, has been looking for years to lower its pension costs. It is a member of the Central States Pension Fund, which had liabilities of $30 billion and assets of $15 billion at the end of 2003, according to an IRS report. Companies in both the single and multi-employer plans pay premiums to the PBGC in return for the guaranty that comes under the umbrella of the PBGC.

UPS has formed a coalition that includes the Teamsters and the National Coordinating Committee for Multi-employer Pension Plans, primarily a union trade group. The coalition is proposing that plans that are funded at 65% or less be required to increase employer contributions, and to develop a broad reorganization plan to raise funding above 80% within 10 years.

While the PBGC is on the hook to pay over $45,00 to retirees as a maximum from single defined-benefits plans that it takes over, the agency covers about $12,000 as a maximum for failed multi-employer plans.

(5/05)- The Canadian province of Ontario surpassed Michigan for the first time last year to become the largest auto production state or province in North America. Most of us think of the third world countries when we think of the exporting of jobs but here is an example of the exportation of jobs with one of the reasons being the lower cost structure for an employer in a country that has a national health system.

(5/27/05)- Many workers in the health care and human services industry have defined-benefits plans that are not insured by the Pension Benefits Guaranty Corporation (PBGC). There are an estimated 20,000 defined-benefit plans at professional-services businesses that employ fewer than 26 employees that are not insured by the PBGC. These employers don’t have to file a summary plan description with information about eligibility and how the plans are calculated.

When ERISA was enacted in 1974, religious affiliated pension plans were exempted because they were considered more stable at that time. Also since nonprofit organizations usually operate on a tight budget they were granted leeway to avoid costs related to reporting and disclosures.

Railroad workers have their own system well funded by contributions from companies and workers, so the system, which is not insured by the PBGC doesn't expect to have any cash-flow problems for at least 22 years.

(5/23/05)- Judge Eugene R. Wedoff of the Federal Bankruptcy Court in Chicago has ruled that United Airlines could terminate its four employee defined- benefits retirement plans. United has been operating under the bankruptcy laws since it filed for it in December 2002. The ruling frees United, a unit of UAL Corporation from $3.2 in pension obligations over the next five years. The government measures United's pension shortfall at close to $9.8 billion. United plans to switch current employees from defined-benefit retirement plans to defined-contribution plans like 401 (k) programs.

United had reached an agreement with the Pension Benefits Guaranty Corporation (PBGC) on a $1.5 billion plan that would give the agency a stake in United when the airline emerges from bankruptcy. The Flight Attendants union and the Aircraft Mechanics Fraternal Association have threatened to strike if the ruling is carried out, since it means reduced pension benefits for its members. This year the maximum paid to most retirees is $45,614 for a 65-year old person. This would mean sharply reduced pension benefits for most pilots who were required to retiree when they were 60 years old.

Judge Wedoff said that because the PBGC initiated the pension termination, the union's contracts with UAL were not breached. If the PBGC did not act when it did, its liability for coverage under the federal insurance plan would have been a great deal more than it is by having the plans terminated as early as possible.

The Bush administration is considering several proposals to shore up the PBGC including an increase in the basic annual premiums companies would have to pay to $30 per worker from its present level of $19 per worker that has been in effect since the agency was created in 1974. One recently introduced piece of legislation would carve out a special break for the airline industry for a period of 25 years, but there has been a great deal of opposition to any plan favoring one industry over another.

According to the PBGC, defined-benefit plans cover 205 of private-sector employees at companies of all sizes, down from 40% two decades ago. Taken together, the defined-benefit pension plans are underfunded by an estimated total of $450 billion according to the PBGC. The airline shortfall is estimated to be at about $31 billion