Corporate Retiree's Health-Care and Pension Plans- Part I of a II Part Article

Corporate Health-Care and Pension Plans- Part II of a II Part Article

To see Part I of this article please go to: "Corporate Health-Care and Pension Plans-Part I"

(1/2/10)- David Zion an analyst at Credit Suisse Group, estimated in a recent report that he wrote that about $400 billion in pension assets held by Standard & Poor's 500-stock index companies were lost in last year's market crash. That represented about 27% of their assets. The S&P 500-stock index is up about 23% so far this year, but that still leaves a gaping hole for many companies to fill in the next 7 years.

Recent legislation increased the amount of allotted time before pension liabilities have to be fully funded for most corporations.

In his report, Mr. Zion now estimates that about $270 billion in pension deficits, down from about $298 billion in deficits at the start of the year, must have to be filled in this period of time.

(12/27/09)- The Ford Motor Company has offered buyout or retirement incentive packages to all of its 41,000 hourly workers. A company spokesman, Mark Truby stated that the company still has too many workers in light of present car and truck sales. Ford is down to about one-third the work force that it had several years ago.

Under a new contract with the UAW, the employees get most of their pay for a year before they are removed from the payroll. In the past, laid-off workers went into the "jobs bank" and were paid indefinitely even if their factory had been shut down.

The buyout package, offered to workers with at least a year of service, includes $50,000 cash and the choice of a $25,000 voucher to buy a car, or $20,000 more in cash.

The deal also includes basic health care coverage for six months. Retirement eligible workers can take the buyout but must wait up to 18 months before retiring.

The retirement package includes $40,000 for skilled workers and $20,000 for non-skilled workers. To be eligible, workers must have at least 30 years of service, be age 55 or older with 10 or more years of work, or be 65 years of age, with at least a year of service.

Earlier this year, only about 1,000 workers took similar packages.

Ford started 2009 with 89,000 workers in North America but has reduced that number to 80,200 as of September 30^th, through attrition buyouts and layoffs.

(12/22/09)- The sharp stock market decline in 2008 caused a sharp reduction in the value of pension assets for the vast majority of pension plans. This in turn meant that many corporations either froze or cut the benefits in their plans.

Hewitt Associates, a human resources consulting firm recently released the results of its annual Global Pension Risk survey, which found that most of the 153 large U.S. employers have adopted funding policies meant to keep their funded level at or above the 80% mark.

The number of firms considering closing or freezing their plans has nearly tripled from a year and a half ago, and they are five times more likely to consider delegating their investment policy entirely to professional advisors than last year.

Almost 40% of companies surveyed have reduced their equity exposure. When this occurs it is usually a pretty good sign that the market has reached a bottom.

(12/15/09)- On May 4^th we wrote the following item below: "Please see our items dated 4/10/09 below, and our items dated 8/27/08; 10/25/07 7/9/07; 2/11/07; and 2/3/07 in Part I of this series of articles wherein we discuss the establishment of the Voluntary Employees' Beneficiaries Association (VEBA)."

The Labor Department's Employee Benefits Security Administration said that it had proposed granting Ford an exemption to federal pension law. Ford needed the exemption so that it could substitute stock for up to half of its obligations to a union-managed fund.

Health care coverage for about 285,000 Ford retirees and their dependents, along with some active workers will shift on January 1 from Ford to the fund, as per its contract with the UAW in 2007. Both GM and Chrysler have similar arrangements with the UAW, which will also take effect next month.

Ford owes an initial payment of $1.9 billion to the retiree fund at the end of the month, with up to $600 million of that amount payable in stock.

The proposed exemption would allow Ford to transfer securities to the fund, allow Ford and its health plans to reimburse each other for payments paid by the wrong entity as benefits are transferred to the fund, and let Ford recover deposits mistakenly made to the plan.

(11/9/09)- A bill has been introduced in the U.S. House of Representatives that would allow companies to spread out required contributions to retirement plans over nine years, rather than the seven years as required now. Under the proposal, companies would make only token payments for the first two years.

The proposal would also give employers up to 15 years to fully fund their plans if they agreed not to freeze benefits. At last count, the Pension Benefit Guaranty Corporation had a $33.5 billion deficit.

The bill was introduced by Representative Earl Pomeroy, a North Dakota Democrat, and Representative Pat Tibert, an Ohio Republican.

(6/10/09)- Under the pre-packaged bankruptcy filing for GM, the "good" parts of the company would be sold to the "new" GM. Under the terms of that sale, the workers for GM would have their pension and health care benefits covered by the "new" company, and they would remain in force.

A company has the right, under bankruptcy law, to request that the bankruptcy judge terminate its pension plans. If the pensions were terminated, employees would then receive their payments through the Pension Benefits Guaranty Corporation (PBGC), as we note in our item dated 6/3/09 below.

The PBGC will pay a maximum of $4,500 a month ($54,000 a year) for a retiree who started getting payments at age 65. The maximum would be lower for those collecting payments at a younger age or for those who include benefits for a survivor or a beneficiary.

A company can also eliminate retiree health care benefits for nonunion employees, even though it had previously stated, in writing that it would not do so. Workers over 65 could apply for coverage under Medicare without having to pay a penalty for late application, provided t they could show that the company's health care plan was "as good as" the coverage under Medicare

(6/3/09)- As is all too evident from the news on Monday, June 1, much to my chagrin ,GM did file a bankruptcy petition in the federal court in New York city. I was wrong in predicting that they would not do so, and do hereby admit my mistake.

The GM bankruptcy will cost the Pension Benefit Guaranty Corporation (PBGC) at least $6 billion and the Chrysler bankruptcy will cost the agency at least $2 billion. According to the most recent numbers, the PBGC was running a deficit of $33.5 billion, and thus these latest bankruptcies will mean the deficit for the agency will continue to grow. Please see our article The Pension Benefits Guaranty Corporation (PBGC) and Corporate Bankruptcies for more information on this topic.

As that article points out, increasing the premiums paid by the corporations covered by the PBGC in case of failure might in turn mean more of corporate America would have to go the bankruptcy route.

Whether or not the Obama administration has chosen the right route to go in allowing GM to go into bankruptcy is a decision that only time will be able to tell if that was the right choice. It certainly is interesting times that we are living through right now.

(5/26/09)- Chysler LLC, which filed for bankruptcy protection on April 30^th, will offer workers who have 30 years of pension-credited service, are age 65 or older with at least one year of pension credited service, or are 60 or older who meet other requirements a $50,000 lump-sum payment plus a $25,000 vehicle voucher.

Employees who are aged 50 to 62 with 10 years of pension-credited services won't see retirement benefits reduced by early retirement. Employees taking a voluntary termination who have at least one year of seniority will get a lump-sum payment and a vehicle voucher, depending on how long they have worked for the company.

Employees at the company's St. Louis North and South plants who are not eligible for retirement or early retirement but who take pre-retirement leave will be put on a leave of absence at 85% of their base wage until their earliest possible retirement date.

(5/23/09)- Under changes being phased in through 2011 as required by the Pension Protection Act of 2006, companies will have to close any funding gaps on certain pension plans by 2018. Because of the increased number of bankruptcies caused by the recession the Pension Benefits Guaranty Corp.'s (PBGC)deficit continues to grow.

The latest estimates for the deficit of the PBGC now stand at over $20 billion. If the fee being charged to corporations to be covered by the agency are increased that in turn will mean many of the weaker companies will be unable to afford the coverage. Will the U.S. Treasury be forced to make up the difference?

(5/4/09)- Please see our items dated 4/10/09 below, and our items dated 8/27/08; 10/25/07 7/9/07; 2/11/07; and 2/3/07 in Part I of this series of articles wherein we discuss the establishment of the Voluntary Employees' Beneficiaries Association (VEBA). As we pointed out in those items, VEBAs have been around since the early 1920s, but we have copied below for your convenience the item from 2/3/07 because of its particular relevance today.

If everything goes according to the Obama administration's, plan the VEBA will own about 55% of the new Chrysler. The VEBA will administer the health plan for the company's workers and retirees and their families. It is critically important for the VEBA to contain the health care costs of its members, or it too will go bankrupt down the road.

(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

(5/3/09)- According to the latest figures available, Chrysler Corp, which applied for bankruptcy court Chapter 11 protection in the federal court in New York City, has a pension liability of about $9.2 billion. Daimler Corp., the German auto company that formerly owned a 19.9% stake in Chrysler will pay in about $600 million to the company's pension funds to settle its guaranty obligation to the Pension Benefits Guarantee Corp.

Companies have the right to terminate their pension plans under bankruptcy law. If a company does make such a request to the bankruptcy judge, who in this case is Arthur J. Gonzales, the same judge who presided over the Enron and Worldcom bankruptcy proceedings, would convene a brief trial on the subject and hear both sides. Under the agreement reached between the U.S. government, the UAW and the company's bondholders, the pensions plans will not be terminated.

If the pension plans were to be terminated, the pensioners would then receive their payments, up to the maximum allowed under the law from the Pension Benefits Guaranty Corp. For further information on this agency please see our article on the Pension Benefits Guaranty Corp

Chrysler's pension liability would shift from the defunct company to the new company that would be under the direction of Fiat. All key parties to this arrangement have agreed to the matter so that the PBGC would not be liable for the pension benefits to be made to Chrysler retirees.

In the matter of the health care benefits, they will be assumed by the Voluntary Employees' Beneficiaries Association (VEBA) to which the U.S. Treasury is giving a $4.6 billion note, payable over 13 years, at a 9% interest rate, with the VEBA receiving about $5 billion in Chrysler stock that it will be able to sell in the market place as it needs additional funding. .

If the new Chrysler goes under, the PBGC would assume responsibility for the pensions at that time.

The VEBA can begin adjusting workers' health care benefits in 2010, two years sooner than under the previous contract.

(4/10/09)- GM and Chrysler have been headline news stories for the last couple of weeks and the matter is now coming to a head. The president's auto task force has given Chrysler a month to agree to a merger with Fiat and GM has until June 1 to renegotiate a favorable deal with its bondholders and extract more give- backs from the UAW.

Please see our items dated 8/27/08; 8/15/08; 7/9/07; 2/11/07; and 2/3/07 in Part I of this series of articles wherein we discuss the establishment of the Voluntary Employees' Beneficiaries Association (VEBA). When GM and the UAW came to an agreement about the VEBA, it was agreed that GM would contribute $20 billion in cash to the UAW to set up the health care program under the union's auspices. Chrysler's agreement with the UAW called for the company to contribute about $10 billion to the fund.

According to the latest news reports both GM and Chrysler want to contribute only about half those amounts in cash, with the other half being paid in the form of common stock of the respective companies.

Many have called the standoff between the bondholders and the president as a game of "chicken". Many on the bondholders committee now negotiating with GM say that they doubt the president will allow the company to go into bankruptcy, so they have been holding out for better terms for the approximately $29 billion in bonds that are outstanding.

It may come down to the wire on June 1, but we at therubins expect that all sides will bend and that an agreement will be reached between the bondholders and GM. The UAW and GM will also come to an agreement re additional givebacks, including changes in the VEBA funding, so as to avoid bankruptcy by the company. In all likelihood, the agreements wou't be finalized until shortly before the June 1 deadline.

(3/29/09)- GM announced that over 7,500 members of the United Automobile Workers union who work in its factories had accepted the buyout offer that we discussed in out item dated 2/11/09 below. This buyout package was worth up to $45,000 which was sharply lower than the earlier buyout offers the company made to its workers. Most of the workers will leave by April 1.

According to press reports, President Obama on Monday March 30, will announce some sort of additional loans to GM conditioned on additional concessions from its bondholders and agreement between the union and the company on payments to be made to the newly created union health plan. GM wants to substitute stock for the up to $20 billion cash that it originally agreed to pay into the health plan.

The UAW has agreed with Ford to allow it to pay in up to half of its payments into the health fund with Ford stock instead of the all cash $6.5 billion that was originally agreed to.

GM has borrowed $13.4 billion from the federal government since December, and is asking for $16.6 billion more. The auto task force that was checking into the viability of GM plan to continue as a profitable business down the road will continue to oversee the situation, with bankruptcy remaining a possibility.

(3/7/09)- A bankruptcy court judge in New York agreed to let GM's former parts division, the Delphi Corporation, eliminate health care benefits for 15,000 of its salaried retirees. Delphi was spun off from GM in 1999.

More than 1,600 Delphi retirees wrote to the judge last month asking that he not let the company terminate the benefits. Lenders to the company had demanded the elimination of the benefits, which will save the company $70 million a year.

(2/11/09)- Nearly all of the remaining 62,000 GM and 28,600 Chyrsler hourly workers are being offered buyout packages, as the companies and the United Automobile Workers continue to negotiate revised contract terms that they must present to Congress by February 17^th as part of the deal to get federal money to be able to stave off bankruptcy.

The buyouts being offered this group of workers is much less than what had been previously offered to the employees in the last few years.

Qualified Chrysler workers are being offered $50,000 and a voucher worth $25,000 towards the purchase of a new vehicle. If the worker is willing to give up the company-paid health care benefits the offer increases to $75,000. Almost 5,000 Chrysler workers accepted a slightly higher offer from the company in October and voluntarily left the company. The Chrysler workers have until February 25^th to accept the offer. The vehicle voucher is good for 18 months.

GM said that it hoped to cut about 31,000 hourly and salaried workers through this latest buyout offer.

The UAW and the auto companies have agreed to give up the jobs-bank program, wherein idled workers could receive up to 95% of their pay until the company rehired them.

Please keep in mind also that under the new auto contract, newly hired workers start at about 1/2 the hourly earnings rate of older employees, and the new hires are receive lower pension and health care benefits.

GM workers are being offered $20,000 in cash and a $25,000 new vehicle voucher. To compare these amounts with previous offers that these companies made to their employees who were willing to leave the company please go back to Part I of this article to see what those terms were.

(1/6/09)- Now you can add the name of Sears Holdings Corporation, the department-store holding company, to the growing list of corporations that will stop matching contributions to its workers' retirement plans, in this case effective January 31^st.

The company said it would resume its 401(k) matching program when its "financial performance improves to a level adequate to support it".

Sears recorded a $91 million expense for retirement savings plans in 2007, according to its annual report filed on March 26, 2008. A spokeswoman declined to comment on how much the company would save by not matching employee contributions.

(12/23/08)- Add the name Motorola Inc. to the growing list of U.S. companies that announce that they are suspending payments to the company's employees' retirement savings plans, just weeks after announcing broad cost reductions and layoffs. As corporate America tightens its belt, as the effects of the recession are being more widely felt, you will see more and more of this type of announcement.

FedEx Corp. also recently announced that it would stop contributing to employee retirement plans for at least a year.

Motorola will permanently freeze it U. S. pension plans starting March 1. It will continue to provide funding to meet benefits already vested or earned by employees and retirees, which it had previously had estimated cost $290 million next year. A spokeswoman said the freeze would apply to executive pensions also.

The company closed it pension plan to new employees in January 2005, instead offering new hires a slightly higher match on contributions to their 401(k) retirement savings plans. Motorola said it would suspend those matches, which last year cost $116 million, starting in January.

(12/18/08)- Congress has passed a bill that awaits President George W. Bush's that rolls back parts of the Pension Protection Act of 2006 that will ease requirements on corporations to fund their pensions. This measure was passed in light of the financial difficulties that many corporations are facing because of the recession that the country is now faced with.

The measure would also suspend the minimum-distribution requirement from IRA 401(k) and other retirement plans for 2009 for people over the age of 70 1/2. The sharp drop in the value of these types of plans, caused by the bear market of 2008 is the reason behind this change in the law.

The new relief measure would lower the target levels needed within the 7-year time frame on the path to be fully funded at the end of the 7-year period of time. The following is extracted from our item dated 11/27/08 that contained the requirements that are now being amended:

"This is the first year that private businesses will need to meet the law's more stringent requirement, which include pension-funding levels of 92% in 2008 and 94% in 2009. The pension funds must be fully funded within 7 years, with certain exceptions mainly in the airline industry. Once a company falls behind the designated percentage for a given year, it must go up to the 100% funding the next year."

This is the first year that private businesses will need to meet the law's more stringent requirement, which include pension-funding levels of 92% in 2008 and 94% in 2009. The pension funds must be fully funded within 7 years, with certain exceptions mainly in the airline industry. Once a company falls behind the designated percentage for a given year, it must go up to the 100% funding the next year.

(12/3/08)- GM has more than 400,000 retirees covered under the company's pension fund to which it will be paying about $7 billion a year for the next 10 years. The fund's assets were worth $104 billion at the end of 2007. It will be several months before the exact drop in its value will be known, but since it only holds about 26% of its assets in equities, it may not have suffered as great a loss as most other pension funds have suffered.

The company said it does not plan to add any money to the fund for the next several years. If the company does go into bankruptcy, its liability to continue to contribute to its pension fund is in doubt. Charles E. F. Millard, director of the Pension Benefit Guaranty Corporation asserted that the bankrupt company might still have to contribute to the pension fund.

It is estimated that the total cost of GM's health care benefits to its retirees was about $60 billion at the end of 2007, and the company has set aside only about $16 billion to cover that cost. Please see our items dated 8/27/08; 8/15/08; 7/9/07; 2/11/07; and 2/3/07 in Part I of this series of articles wherein we discuss the establishment of the Voluntary Employees' Beneficiaries Association.

Right now the fact that the GM pension plan had only 26% of its assets in equities looks like a very wise decision, but this may not be true for the future. Historically stocks outperform bonds.

(11/27/08)- The news is full of items about the federal, state and city budget deficits. If you need a reminder, which most of us don't, just take a look at the value of your IRA, Roth IRA and/or your 401(k) plan compared to its value at the end of 2007.

Just as we are suffering so are the nation's largest corporate pension plans which had record loses in October, and it does not look like November will be any better for them. Even Calpers, the nation's largest municipal pension fund is suffering from record loses to the value of its assets.

Because of the recently enacted Pension Plan Act of 2006, which was enacted to safeguard employees pensions, corporate America will not be able to meet federal funding requirements under the act without a massive infusion of cash, which many of them are critically short of right now, or a change in the law.

In October, the 100 largest corporate pensions lost $120 billion, their largest one-month loss in assets since consulting firm Millman Inc. began tracking the numbers eight years ago.

"There will definitely be companies in this group which, without relief or massive contributions, will have to freeze their plans, probably by Oct.1 next year," said John Ehrhardt, principal and consulting actuary at Millman in New York.

He estimated that 100 companies in the index would have to contribute $92 billion in 2009 as opposed to $32 billion in 2008, to meet the minimum funding requirements under the act.

When a plan drops to below the 80% funding level, the plan can not make amendment to increase benefits. Additionally, the workers can only get up to 50% of the lump-sum distribution when they leave. They would receive the remainder of their pension benefit in an annuity.

FOR AN INFORMATIVE AND PERSONAL ARTICLE ON PRACTICAL SUGGESTIONS WHEN SELECTING A NURSING HOME SEE OUR ARTICLE "How to Select a Nursing Home"

By Allan Rubin
updated January 2, 2010

http://www.therubins.com

To e-mail: hrubin12@nyc.rr.com or rubin@brainlink.com

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