Editor's Note- Because of the growth of this article we are starting a Part II item effective November, 2000. Please proceed to see this item at "Corporate Retiree's Health-Care and Pension Plans- Part II"

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"

(2/9/09)- The United Automobile Workers union agreed to drop the job banks program as part of the union's concessions to help GM and Chrysler obtain bridge loans from Congress. The jobs banks program allows autoworkers who are temporarily idled to still be entitled to receive about 95% of the pay.

GM said that there are about 1,600 of its workers who are currently in that program. They will officially be laid off and begin collecting about 72% of their full time pay through a combination of state unemployment benefits and supplemental benefits from GM.

The union also said it would delay required payments into the new VERBA health care trust set up by GM and the union.

(11/21/08)- There is not a day that goes by without the news carrying a story about the potential bankruptcy of GM, Ford and Chrysler. Unfortunately, the weakening of the wealth of corporate America is being reflected more and more in the cutbacks that are being imposed on the pension plans and health benefits of their employees.

About 100,000 white collar retirees of GM will be losing their company health-insurance coverage at the end of the year, as the company seeks to stem its cash outlays. Even though the workers were promised in writing that the coverage was theirs for life, the written promise is not enforceable most of the time.

The move was announced back in July when the company suspended its dividend, and reduced the salaries of workers by about 20%. Union contracts will protect the health care benefits of those covered under those contracts. Ford and Chrysler have also cut the health care coverage of their white collar retirees.

These retirees are therefore going to seek their coverage through Medicare and Medicare Advantage plans, but please keep in mind that what is happening to the auto industry retirees may happen to you when you retire.

In the case of Ford, each retiree is provided $1800 per individual, and $3600 for families, under a Health Reimbursement Arrangement to compensate for the loss of the health care coverage retirement benefit.

(10/4/08)- The Pension Benefit Guaranty Corp. (PBGC) guarantees your pension payments if the company that you work for goes into bankruptcy, but what are your rights in regards to the health-care plan that covers you? Please keep in mind that for pension plans canceled in 2008, the maximum monthly guaranteed payment for a 65-year-old retiree receiving regular payments with no survivor benefits is $4,312.50.

If your company files for Chapter 7 bankruptcy, your health-care coverage will likely disappear.

If the company files under the Chapter 11 provision of the Bankruptcy Code, your health-care coverage could stay unchanged as the company reorganizes.

If you ultimately lose your job, your could be eligible for continued coverage under the Consolidated Omnibus Budget Reconciliation Act, or Cobra. Coverage under Cobra can be for as long as 18 months, assuming your company has more than 20 employees. Please keep in mind that you pay for your coverage under Cobra and that premium can be quite costly.

(9/8/08)- Ford Motor Co. is making a renewed attempt to get its unionized workers to take voluntary buyout packages. In its latest offer, which it is making at 20 of its plants in 3 states, it is following up on the other offers it has made to its workers in the last few years.

The company now has about 44,000 hourly workers. Thus the entire U.S. auto industry continues in its efforts to reduce its cost structure as it attempts to compete with worldwide car manufacturers who have much smaller pension and health benefit fixed costs. This in turn enables the foreign auto manufacturers to sell their cars at a lower price than do American car makers..

This latest round of buyouts by Ford follows its effort earlier this year when fewer than 4,200 hourly workers accepted the company's buyout offer, when the company had hoped to have at least 8,000 workers accept the offer.

The current package included a lump sum of $100,000, early-retirement incentives and educational opportunities. Those workers who accept the buyout must leave by the end of the year.

(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"

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 committee 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 while the auto industry estimated underfunding is $45 billion to $50 billion

As a further example of the problem of underfunded defined-benefits pension plan all we have to do is look at a recent announcement from the Roman Catholic Diocese of Boston. It is proposing to cut pension benefits for priests. Companies that offer pensions are barred by federal law from reducing benefits unless a bankruptcy is involved, but religious institutions, hospitals and schools do not have to comply with the federal law and are generally free to handle their pension funds as they choose.

(5/9/05)- The PBGC and United Airlines have agreed as to the assets that the federal agency will receive in return for assuming the liabilities that exist as a result of United's underfunded four pension funds that the company is no longer making any payments into.

The PBGC will receive two classes of notes and $500 million of convertible preferred stock in UAL, United's parent, when the airline's reorganization is completed. The face value of the securities was set at $1.5 billion, but the market will certainly set a lower value on the notes than the face value. The agreement left open the contentious question of the date on which the agency will take over the pilot's pension plan.

The agency filed suit in December 2004 saying any delay in allowing the agency to take over the plan would increase its losses by $140 million, and called for the plan to be shut down immediately. The suit has been moved to the bankruptcy court and has not yet been decided. The current agreement would give United's bankruptcy judge the authority to choose the termination date, with the agency reserving the right to appeal the judge's decision on this issue.

Normally, when a company with a pension plan goes bankrupt, the agency is on an equal footing with all other unsecured creditors in the bankruptcy matter. The agency estimates that its average recovery is 7 cents for every dollar of underfunding in a failed pension plan. The agency usually receives common stock in the reorganized company.

(4/28/05)-The federal government and United Airlines have reached an agreement wherein the PBGC will take over all four of the employee pension plans of the iarline subject to approval from the federal bankruptcy judge who has been overseeing the case since December 2002. The shortfall in the four plans total $9.8 billion making it the biggest pension failure since the PBGC law went into effect in 1974.

A federal official said that the timing of the termination still had to be worked out since UAL gave its pilots and mechanics pension increases less than 5 years ago. The PBGC phases in its coverage of pension liability over a 5-year period of time. United had been trying to keep the pension plans afloat as long as possible, whereas the federal agency had been hoping to terminate the plans sooner so as to reduce its liability in the matter.

The four pension plans cover about 121,500 employees. The government has estimated that the pension agency will cover about $6.6billion of United's shortfall, while the remainder of the shortfall of about $3.2 billion fall on the shoulders of United's retirees in the form of benefit reductions.

Senator Johnny Isakson, a Georgia Republican has introduced legislation in the Senate entitled the Employee Pension Preservation Act that would allow airlines to stretch out their overdue pension obligations over 25 years, instead of having to cover the shortfall in three years as required by current law. Collectively the 6 big airlines owe $20.8 billion in back payments.

The industry effort began on March 3, when a dozen airline executives and labor leaders met on Capitol Hill with 10 senators. The Senate Commerce Committee convened the gathering. Opponents to the plan argue that if you do this for the airline industry, why not do it for all other industries?

(4/21/05)- For the second consecutive year big corporation pension funds have had positive returns according to a study done by Millman Consultants and Actuaries. The findings in the Millman study were based on a review of the pension information disclosed by America's 100 largest companies in the footnotes of annual reports. This information can differ substantially from the data that the companies submit in connection with the federal pension funding rules.

According to the study the average corporate pension funds had 90 cents for every dollar they owed to workers and retirees at the end of 2004. This figure represents a slight improvement over the 89 cents that was available at the end of 2003. Pension returns for these large 100 companies averaged 12.4% in 2004, down from the 19.6% average return in 2003. When actuaries calculate pension values, they generally spread them over several years, to reduce year-to-year volatility.

Fourteen of the largest 100 companies still included some pension fund income into their operating income, including IBM, GE, Verizon, Lucent, Prudential Financial and Qwest Communications.

The meeting between GM and its unions did not result in any concrete determination to open negotiations between the company and the blue-collar unions that represent its blue-collar workers. The contract is due to expire in 2007 and the company would like to renegotiate certain clauses in the agreement. According to the companies figures salaried workers pay about 27% of their health care costs, while hourly workers pay about 7% of their health costs through co-payments.

Ron Gettelfinger, the president of the U.A.W said, "We'll make joint efforts to lower costs wherever it possible," he said, "whether it pertains to health care or other measures." "Beyond the airline industry, the insurance program (the PBGC) faces tremendous exposure from the auto sector, " said Bradley Belt, executive director of the PBGC.

The PBGC has taken over the pension plans of 141 steel companies, which were underfunded by $10.2 billion, and 12 airlines, which were underfunded by $5.2 billion. The agency is also expected to eventually have to take over the underfunded UAL Corp.'s United Airline pension plans to the extent of another $6.4. As of the end of 2004 the PBGC had $62.3 billion in long-term obligations, but only $39 billion in assets. The maximum guarantee that a worker over 65 can receive from the PBGC is $45,614.

Three large auto parts makers have filed for bankruptcy in the last 6 months, and all three had underfunded pension obligations that will have to be met by the PBGC.

(4/15/05)-The U. S. Supreme Court unanimously ruled that Individual Retirement Accounts (IRAs) are shielded by the federal bankruptcy laws from creditors by the owners of the accounts. Justice Clarence Thomas wrote the opinion in the case, Rousey v. Jacoway, No.03-1407. Thus an IRA account has the same protection from being reached at by creditors, as does money in 401(k) plans, money in company pensions as well as Social Security payments. All are exempt from creditors.

The ruling overturned the decision in the lower court, which was the United States Court of Appeals for the Eighth Circuit, in St. Louis. The Rouseys were an Arkansas couple that worked for the Northrop Grumman Corp. who sought to shield $65,000 in their two IRAs when they filed for bankruptcy in 2001. Grumman required them to take lump sum distributions when they left the company, which they rolled over into two IRAs. The couple filed for bankruptcy under Chapter 7 of the Bankruptcy Code in which a court-appointed trustee supervises the sale of any assets that are not exempt under the statute, and distribute the proceeds to creditors

The bankruptcy court, an appellate bankruptcy panel, and the Eighth Circuit all agreed with the trustee, Jill R. Jacoway that the Ramseys' IRAs were not exempt and were thus available to creditors. The new bankruptcy law that was just passed by Congress does contain a provision that generally addresses "protection of retirement savins in bankruptcy, " which includes IRAs among the retirement accounts to be shielded from creditors.

(4/7/05)- A federal judge struck down a rule passed in April 2004 by the Equal Employment Opportunity Commission that would have created an explicit exemption to the Age Discrimination in Employment Act of 1967 that would have allowed employers to reduce health benefits for retirees when they became eligible for Medicare.

Ten million retirees could have had benefits cut under the rule. The judge, Anita B. Brody of the Federal District Court in Philadelphia struck down the rule and issued a permanent injunction that prohibits federal officials from enforcing it. Under the EEOC rule, Judge Brody said, employers could have given older retirees "health benefits that are inferior" to those given to retirees younger than 65. AARP was the main plaintiff in the case. Chairwoman Cari M. Dominguez of the EEOC said that the agency would appeal the decision

According to a study done by Hewitt Associates and the Kaiser Family Foundation the proportion of companies with more than 1,000 workers offering health coverage to retirees dropped from 80% in 1991 to 57% in 2003. The appeals court ruled on the exact same legal issue five years ago, in a case involving retirees who had worked for Erie County, Pa. According to the written decision from Judge Brody. In that case, the appeals court found that Congress had intended the age discrimination law to apply "when an employer reduces health benefits based on Medicare eligibility."

There is no law that requires employers to provide health benefits to workers or retirees. Employers can legally provide benefits to active employees and not to retirees. Under Judge Brody's ruling if an employer provides benefits to retirees, it cannot discriminate among them on the basis of age. Thus retirees who are younger than 65 cannot be favored over those who are over 65.

Even though the union contract for GM workers does not expire until 2007, the company will be meeting with union officials next month to discuss among other items, the giveback of some health-care benefit costs. The U.A.W. allowed Chrysler recently to start imposing the first health-benefit deductible for its workers or retirees who are covered by preferred provider organizations (PPOs). A provision in the Chrysler labor contract allowed the company to impose this charge when its costs escalated up to certain levels.

When the costs of the PPOs exceeded the costs of the traditional fee-for-service health plans, workers and retirees who wanted to remain in them would have to pay deductibles that ranged from $100 to $1,000. There are 390,000 American workers covered by the Chrysler plan, of which about 35,000 blue-collar workers, retirees and their families use PPOs.

GM has about two and one-half retirees for every worker. The company covers about 1.1 million workers, retirees and their families under their health-benefit contract. The company asserts that its health care related costs for its workers and retirees will be almost $5.6 billion in 2005, an increase of almost $1 billion from the cost in 2004. It is the largest private health care provider in the country.

The company would like to have its blue-collar workers accept the same health benefit cuts already taken by its white-collar workers. GMs salaried workers pay about 27% if their health care bills while hourly workers pay about 7% or their bills.

(3/18/05)- GM certainly has been in the headlines the last few days with the news that its bond rating may be lowered to "junk" status because of all the financial travails the company has undergone the last few years. In concentrating on the company's earnings outlook, the media is missing out on a more critical issue that in all reality faces many of our biggest manufacturing companies today. That issue is can our large manufacturing industry companies compete with the foreign manufacturing companies that do not have the built in costs that our companies are burdened with.

Older U.S manufacturing companies have large fixed costs because of pension and health and prescription drug benefits owed to their employees, their retirees and their families. In the case of GM for every car that comes off the assembly line, there is a cost added on to that care of about $1,400 to cover the pension and health benefits of GM's workers.

If we look back at recent history we see that the steel and airline industries have had a slew of bankruptcies that have cost the PBGC many billions of dollars. When Bethlehem Steel went under the PBGC was stuck with the $3.7 billion liability caused by the company's shortfall. So far this has been the largest shortfall that the agency has had to cover. At the end of 2004, the agency was $23.3 billion in deficit.

The PBGC currently pays benefits to over 1 million people whose pension plans have collapsed. The agency presently covers about 43 million people in this country. According to the PBGC more than 1,200 pension plans have been terminated this year, while 1,193 plans were terminated in 2003

The PBGC presently guarantees over 31,000 private-sector defined-benefit plans, according to Bradley Belt, the executive director of the agency. The agency took over 192 defined-pension benefit plans last year, up from the 155 it took over in 2003.

Back on October 25, 2004 GM Chairman and Chief Executive Rick Waggoner assessed a large part of the company's then stated third-quarter earnings disappointment to the rising health care costs that the company was encountering. The company continues to give this as one of the reasons that the company is having difficulty in being competitive in the auto sales market.

For the year 2003 GM reported that it spent $4.8 billion, or about $3,966 per employee for health benefits. The company put $5 billion into a tax-free trust that it uses to finance future retiree health care costs in the first quarter of 2004. What would happen if GM walked away form its pensions and left the government holding the bag?

(3/15/05)- The Pension Benefits Guaranty Corporation (PBGC) made a motion in the Federal District Court in Alexandria, Va. to immediately terminate the pension plan for the ground workers and mechanics of United Airlines. This motion comes on top of the motion that it had previously made in December to terminate the pilot's plan at the airline immediately.

The reason why the governmental agency is acting with haste in this matter has to do with the amount that the agency insures when a pension plan goes under. According to the law, coverage by the agency is phased in over a 5-year period of time. The law was drawn up with this 5-year phase in plan to discourage troubled companies from sweetening their plans for their workers, and then defaulting leaving the government to pick up the full bill.

United negotiated a pension increase for its mechanics as of March 14, 2002, and a pension increase for its ground and ramp workers as of May 14, 2002. If two years have elapsed and a plan defaults, the PBGC insures only 40% of the plan, while if 3-years have elapsed the coverage increases to 60% of the amount stated in the plan.

Ralph Clerihue, a spokesman for the PBGC stated that keeping the plan going past the 15^th of March would cost the agency about $139 million, and keeping it going past May 14^th would cost it an additional $88 million. United missed a $363 million mandatory contribution due to the plan earlier this year.

Delphi Corporation of Troy Michigan said that it would stop paying medical insurance for about 4,000 retirees once they become eligible for Medicare, which it will supplement with private health care accounts. Delphi said that it spent about $1.1 billion on health care last year. The company said that it expected to save about $500 million over several years as a result of this move. The company will hire a company to manage the new medical accounts. People who were hired by the company after 1993 were never given retiree-health benefits.

(3/09/05)- David Zion, an accountant and analyst at Credit Suissse First Boston estimates that only about 40 of the largest U.S. companies will report surplus pension money for 2004. This number is down sharply from 1999 when 254 of the largest companies reported a surplus, and even down from the 51 that reported a surplus in 2003. According to Mr. Zion only about 370 of the largest companies in this country, as ranked by the S&P 500 have defined-benefit pension plans.

In his recent proposals to improve the health of the Pension Benefits Guaranty Corporation, President Bush's administration hoped to encourage larger contributions into the plans by raising the current ceiling on the tax deductibility of the contribution. Advocacy groups for many of the large corporations are requesting inclusion in any changes to include a provision that the contributions can be withdrawn without incurring a large excise tax as is the case under the law today.

The removal of surplus funds from a pension plan is called a reversion. So many companies raided these excess funds in their pension plans that it caused Congress to impose a 50% excise tax on pension reversions in 1990. The American Benefits Council, which represents companies with pension plans, stated, "The fear of creating unusable capital will clearly discourage many employers for maintaining defined-benefit plans."

The imposition of the excise tax was one of the reasons that cash-balance plans became the vogue to replace defined-benefit plans. There is no excise tax when money is withdrawn from a cash-balance plan as there is for a withdrawal from a defined-benefit plan. According to Mr. Zion, companies with surplus pension assets would not be tempted to take money out of their pension funds if the excise tax was lifted since current accounting rules allow companies to include some of the projected earnings from their pension investments in their current earnings.

Again according to Mr. Zion's figures, Bell South derived about $486 million, or 8% of its $6.1 billion in operating income in 2003 from pension fund activity. Some of the companies that pulled out enormous amounts of pension money in the 1980's are now on Mr. Zion's list of most underfunded pension plan companies. Exxon Mobil has the second largest deficit in the S&P 500-stock index, $10.1 billion in 2003. In 1986 withdrew $1.6 billion from its employee's pension funds that was considered surplus.

Phillips Petroleum reverted $400 million in 1986, and yet its successor, ConocoPhillips, reported a deficit of $2.7 billion in 2003. United Airlines, a company which is now in bankruptcy and is abandoning its pension plans withdrew a $254 million reversion in 1985. If the bankruptcy court allows United to drop its pension plans the PBGC will be left to pick up the pieces from the default.

(3/3/05)- The PBGC stopped publishing a list that it had previously published that contained the 50 corporate pension plans with the biggest funding shortfalls. Maybe it is time for them to start publishing that list again. Companies whose pension plans are underfunded by at least $50 million are required to file a plan with the PBGC in regard to how they would fund the plan on a termination basis. Terminating a plan drives up its costs because it requires the company to buy annuities immediately for all the participants so as to be able to pay out all the accumulated benefits.

"There is a tremendous lack of transparency in the system" according to Bradley Belt, executive director of the PBGC. "It's a study in obfuscation," said Mr. Belt. As a prime example of how confusing the whole situation is all we have to do is look back at the Bethlehem Steel bankruptcy case, which cost the PBGC $3.7 billion.

According to documents that Bethlehem filed with the IRS is 2001 the company's pension plan had enough money to cover 84% of future benefits. In its filing with the PBGC is said it only had 61% of the assets needed to cover its pension liabilities. In the company's annual report to its shareholders it stated that it had 73% of the needed assets to fund the plan. When the PBGC took control of the plan in 2002, it turned out that the company only had 45% of the needed assets to fund the pension plans of its employees.

(2/24/05)-The pilot's union at Northwest Airlines announced that it would discuss the possibility of voluntarily freezing its underfunded defined-benefits pension plan. At the same time the company may start a company funded defined-contribution plan to replace the defined-benefits plan. The union's stance was prompted by the realization that the plan may not provide the promised benefits.

Under a defined-benefits plan, the participant receives a set amount of money upon retirement. Under a defined contribution plan, the company contributes a set amount of funds into the plan. The problem arises in a defined-benefits plan, if there is not sufficient funding to pay the promised benefit.

At the end of 2003, Northwest's pension plans were underfunded by $3.75 billion. Please keep in mind that if a company goes into bankruptcy the federal PBGC takes over operation of the company's pension plans. If the plan is underfunded there may not be sufficient assets in the plan to pay the promised benefits. If the PBGC has to take over the plan, the retiree may receive less than what was promised under the plan.

(2/14/05)-President Bush included in his budget some proposals that his administration intended to take to shore up the liquidity of the Pension Benefits Guaranty Corporation. (PBGC). According to the latest numbers, the PBGC is operating at an over $24 billion deficit.

One of the proposals calls for an increase in the basic annual premiums paid by companies to $30 per worker from the current rate of $19. This would be the first increase in the rate since 1991. Another proposal calls for increased payments into the fund from companies that have been building up their pension deficits. This latter proposal is intended to bring the weaker companies into a more balanced situation with the fund. This proposal may however push some weaker firms over the edge and into bankruptcy.

The argument favoring the increased payments from the weaker firms is that the healthy firms, who have paid their dues all along, should not have to be penalized because of the failures by the weaker firms.

The administration estimates that the new rates would increase premiums by $2.2 billion in fiscal 2006, and by $3.7 billion in 2007.The premiums presently bring in about $1 billion a year.

(2/8/05)-The PBGC announced that it had assumed control of three pension plans covering US Airways' mechanics, flight attendant customer service agents and other workers. A bankruptcy court judge had given the airline permission to cancel its union contracts and end the programs last month. The agency had taken over the company's pilot's pension plan in 2002, when the company had filed for bankruptcy at that time.

In total, the agency has assumed $3 billion in pension liabilities of US Airways, the second-largest debt the agency has taken on in it 31-year history. Bethlehem Steel Corporation's pension liability of $3.7 billion shortfall is the greatest default so far in the history of the agency. The PBGC's deficit grew to $23.3 billion in 2004 from about $11.2 billion in 2003. The fiscal 2004 liability included the default by US Airways. US Airways must file a reorganization plan with the bankruptcy court in Arlington, Va. by February 15^th, under an agreement with one lender, the aircraft-finance unit of GE.

(1/28/05)-In a move that surprised some pension experts, SBC Communications Inc. announced that it has frozen its cash-balance plan for 55,000 salaried managers and moved them back into a defined-benefits plan. This reverses the trend of the last several years where companies switched their defined-benefits plans into cash-balance plans. SBC had converted its defined-benefits plan to a cash-balance plan for these same managers in 1997.

The company confirmed that the move back to the traditional type plan would reduce its pension liability and generate gains that will be recognized over time. It did not say how much that gain would be. In the short run it will cause about $100 million of non-cash charges. Under a defined-benefits plan formula most long time employees of the company benefit with higher pensions upon retirement because their higher salaries weight the calculation in their latter years.

Under cash-balance plans, an employee's pension benefit grows by a set percentage of pay each year. When a plan is converted from a defined-benefits plan to a cash-balance plan, the older employees who have been with the firm a longer period of time initially suffer what can amount to between a 20% to 40% reduction in their pensions.

In moving back to a defined-benefits plan, SBC said that, "We want to focus our pension resources more in favor of people who are long service employees, and provide less benefit for those who are not with us a long time."

Since the cash-balance plans are being frozen, that means that the pensions contained therein won't grow with the passage of time, though it will earn interest every year. Corporate pension liabilities generally fall whenever a company freezes an existing pension plan, because the company projections of what the workers will build up in a plan until they retire will be lowered.

United Airlines and the leadership of its pilots union reached a tentative agreement on a new labor pact to replace a previous agreement that had been rejected by the judge overseeing the bankruptcy proceedings in the federal court of United's parent UAL Corp. United's 6,600 active members must ratify the new agreement.

A previous agreement that had been reached between the company and the pilot's union was thrown out by U.S. Bankruptcy Court Judge Eugene Wederoff on January 7^th. The new pact if approved by the pilots and the judge, postpones the pension termination question for 90-days while the company and its unions try to explore ways of salvaging those benefits.

UAL has written a letter to the pilot's union that it intends to ask Judge Wederoff to schedule a trial on pension terminations in early May. Voting on the new agreement will take place until the end of January by the pilot's union.

(1/12/05)-The Labor Secretary Elaine Chao outlined the Bush administration proposals to shore up the Pension Benefits Guaranty Corp. (PBGC) in order to help alleviate the $23.3 billion deficit that the agency is now operating under. The proposals included a sharp increase in the premiums that a company must pay in order to have its plan covered by the PBGC, and new provisions as to how companies with poor credit ratings must act in the future.

One of the proposals would require an increase in the premiums that companies must pay to insure their defined-benefits pension plan would by $30 a year for each active worker and retiree, up from the $! 9 premium that is now paid by the employer. Companies with below investment grade bond ratings would have to meet a higher standard for funding their pension plan. The proposals must be approved by Congress before they can become effective.

Companies would be allowed to use corporate bond rates rather then treasury rates in estimating the investment return that the plan would earn down the road. The higher the rate of return that is used to estimate how much the plan will earn, means that the company would have a lesser amount to contribute towards its funding.

Companies with junk-grade ratings would be required to report the amounts promised under its plan, and the plan's level of funding on the assumption that the plan would terminate immediately.

One of the major problems in increasing the premium rates would be to put an even greater burden on those companies that are in jeopardy of going bankrupt. At the present time 5 airlines are in bankruptcy proceedings, so increasing the premiums would be an even greater burden on these weakened companies.

(1/8/05)-Judge Eugene R. Wedoff of the Federal Bankruptcy Court in Chicago has rejected the contract arrived at between UAL Corp. and its pilots' unions, saying that the agreement unfairly forced the three other unions of the company into letting United terminate their pension plans. The pilots' union and United must now resume negotiations for a new deal that would then have to be agreed upon through a vote of the 6,400 members of the union. Creditors of the company had also opposed approval of the contract.

The Pension Benefits Guaranty Corp. (PBGC) had interposed its objections to the terms of the tentative contract agreement between UAL Corp. and its pilot's union wherein the company no longer would be obligated to honor old pension agreements with its employees and retirees. Bradley Belt, the PBGC's executive director, said that the agency will closely "scrutinize the agreement" and "take all appropriate steps to protect the financial interests" of the agency.

As part of its legal tactics in this matter, the PBGC has acted on two fronts. On the one front it filed a complaint in the Federal District Court in Chicago, saying the agreement between United and its pilots' union was abusive and constituted legal grounds for the pension plan to be terminated immediately and involuntarily. The agency requested that the defined-benefits pension plan for the pilots be terminated as of December 31, 2004, and that the agency be named the trustee.

An involuntary pension termination in district court has different legal standards from a termination in bankruptcy court. In an involuntary termination there is no need to have a new agreement negotiated between the company and the union. The agency would take over the plan regardless of what was negotiated on between the company and the union. It is highly unusual for a bankruptcy judge to reject a ratified contract. Judge Wederoff said that he took the step with "extraordinary reluctance". In this case one union was arranging for the termination of the pension plans of other unions, and was prolonging the life of its own pension plan for several months, when in fact this could cause additional costs to the PBGC.

The PBGC filed a motion with the bankruptcy court in Chicago that is overseeing the UAL Corp. matter, asking that the pension plan for the pilots union be terminated immediately instead of in May 2005 as requested by the company and the pilot's union. The UAL pilot pension plan has$5.7 billion in liabilities and only $2.8 billion in assets to cover those liabilities. The pension agency said that it expected to be liable for about $1.4 billion of the $2.9 billion in under-funding.

If the plan were to terminate immediately the PBGC could save about $140 million in potential liabilities since the pilots would have additional benefits accruing if the plan terminated in May 2005. As of its fiscal year 2004, the agency has about a deficit of $23 billion. If the agency has to assume the under-funded plan, it would be the third largest under-funding in the agency's history. There are approximately 14,000 active and retired pilots in the UAL plan, but retired pilots would be hurt even more than the active pilots when the agency takes over the plan because of limitations that exist when the PBGC takes over a plan.

UAL is hoping to shed all four of its defined-benefits plans with the respective unions. The Air Lines Pilots Association and the company arrived at a proposed five year labor contract that called for the termination of the plan. The agency has moved to take over pension plans before. In 2002 it takeover of the pension plan of Bethlehem Steel Corp.'s plan thwarted the company's plan to reduce employment through early-retirement packages.

When a company defaults on it pension plan the agency pays the retirees their benefits within certain limits that usually means reduced benefits for those who are getting larger amounts of pension retirement income. If the United plan were delayed in terminating, that would mean that the active pilots would qualify for a higher level of insurance coverage. Some retired pilots would however suffer because they would receive lesser amounts if the agency took over the plan.

The PBGC presently guarantees over 31,000 private-sector defined-benefit pension plans. According to Mr. Belt, "The company and the pilots' union have no authority to force the other workers and the PBGC to accept the termination of those plans." The company said that it intended to show the bankruptcy judge that it wouldn't survive outside of Chapter 11 if it maintains the costly, under-funded pension plans.

In the late 1980s about 40% of the workers were covered by defined-benefit plans. Now only 20% of the workers are covered by such plans. In the latest blow to defined-benefit plans the Air Line Pilots Association for United Airlines agreed not to oppose United's parent, UAL Corp's effort to terminate the plan. The matter is presently pending before a bankruptcy court.

As part of the agreement UAL would issue to the union $550 million in convertible notes that the 6,600 active pilots could sell in the capital market to raise money to cover a portion of the pension shortfall. The agreement still must be ratified by the union's membership. UAL in turn hopes to foist its four pension plans on the PBGC, which would save UAL from making more than $4 billion in contributions through 2008.

The PBGC is opposing the move because it says that the pension debt of $8.3 billion is legally binding on UAL. The company has 123,000 active and retired workers. If the members approve the new contract, the airline would put 6% of their annual pay into a new retirement plan. The company would also contribute 9% of the employee's salary into an already existing 401(k)-type plan.

The retirees have formed their own committee to fight the termination in the bankruptcy court, since its members would be effected by the changes, since most pilots had compulsory retirements at the age of 60. Under the complex PGBC payment plan, those who retire at a younger age are more affected than older retirees by the limits as to how much the agency can pay them in retirement benefits.

The Bush administration announced that it was considering steps that it might take to shore up the PBGC in light of the rising deficits that the agency was incurring. Last year the agency posted a deficit of $23.3 billion. With five airlines now in bankruptcy proceedings that deficit is likely to continue to grow over the immediate future. The agency has 462.3 billion in long-term obligations to pay workers' pensions, but only $39 billion in assets taken over from failed employer plans.

The agency is primarily funded through a premium of $19 per participant per pension plan. This basic rate is the same since the system was created in 1991. The premiums rise when pension plans develop big deficits, but these are the pension plans that often are the ones that fail. One possible solution that might help would be an increase in premiums, but this in turn could push some of the near bankrupt companies over the edge.

Another area of concern is where a pension plan takes greater risks so that it may incur higher rewards. If the risks fail the PBGC is left holding the bag. Rep. John Boehner (R-Ohio) chairman of the Committee on Education and the Workforce is the point man for the administration on this matter. Senator Charles Grassley (R-Io.) is leading the issue.

On the other hand, Judge Stephen Mitchell, sitting in the U.S. Bankruptcy Court in Alexandria, Va. ruled that U.S. Airways could terminate three pension plans since they were a "financial albatross", before the company could propose a feasible reorganization plan. The pension plans would have consumed nearly $1 billion in contributions in the next five years.

In this case the union is the International Association of Machinists, which represents about 8,450 airline mechanics and other employees. He also approved the request to terminate the pension plans for machinists and flight attendants. U.S. Airway had filed for bankruptcy in September, which was the second time the company had made such a filing in three years. Judge Mitchell's ruling also permitted the airline to cancel its contracts with the unions. It was the first time an airline was allowed to cancel a labor agreement since 1983, when Continental Airlines used the practice in bankruptcy court causing Congress to change the law at that time.

(12/17/04)- In a move that may be emulated by many other U.S. corporations, IBM announced that it would exclude new workers from its cash-balance pension plan starting January 1, 2005, and offer them only 401(k) savings plans. The move would not effect current employees or retirees and will have little impact on the company's cash flow.

IBM's 401(k) plan for new workers will provide a matching contribution by the company of as much as 6% of pay for those who choose to participate, and the company's contribution will become vested after one year. The company's cash-balance plan provides a contribution of 5% of pay but does not vest for five years. By excluding new workers from its pension plan means that IBM's pension liabilities won't grow in connection with new employees.

Thus corporate America is moving away from the original defined benefits pension plans and the cash-balance pension plans towards the 401(k) plans for new workers and thus will be reining in its unforeseen future pension liabilities for new workers.

(11/26/04)-Bradley D. Belt, the executive director for the Pension Benefit Guaranty Corporation announced that the agency's deficit had doubled in the last fiscal year to $23.2 billion. The agency has incurred a $12.1 billion loss in the last fiscal year according to the agency's audited annual report. Much of last year's loss was attributed to failures in the airline industry. The agency took over 192-pension plans in the last year, up from the 155 it took over in 2003. The agency takes over defined-benefits pension pans when they become insolvent, and pays at least a portion of the benefits promised to a retiree. About one-fifth of the present U.S. workers are covered by defined-benefits pension plans.

The agency was created in 1974, but Mr. Belt said that the fiscal crisis that the agency now is faced with is the greatest in its history. The agency itself has no legal authority to remedy the situation, it can be cured only by action of the Congress. Congress however has not addressed this issue since the late 1980's, when a large number of the steel companies went into bankruptcy. There are now many financial experts who are predicting that if Congress does not act soon to remedy the situation, it may end up costing the government more than the over $200 billion that it cost to remedy the savings and loans disaster of several years ago.

"The PBGC is living on borrowed time" said Representative George Miller (D. -CA.) who has been involved with this issue for quite some time now. With reserves of $39 billion, but with pensions owing retirees about $62.3 billion the agency will run out of money somewhere in the future unless action is taken now. The PBGC charges about 1% premium of sponsoring companies' contributions to their plans each year. The agency also gets money from its investments and the assets as well as the obligations for any plan that it takes over.

The Treasury Department withdrew proposed regulations on cash-balance pension plans that critics claimed discriminated against older employees. Cash-balance plans are pensions that instead of guaranteeing a stream of monthly payments in retirement, as traditional pensions do, provide hypothetical accounts for individual employees that grow each year with contributions. More than 7 million people are covered by cash-balance pension plans. The number of cash balance plans have jumped from 1,231 in 2000 to 1,965 in 2002 according to the latest pension figures from the Internal Revenue Service and the Pension Benefit Guaranty Corp.

When these new plans were adopted older employees saw their pensions drop by as much as 20% because of the new formulas used. The proposed regulations had concluded that the cash-balance plans should be excluded from age-discrimination laws that pertain to pension plans. The Treasury move means that cash-balance plans, that have been adopted by more than 300 companies, will remain in regulatory limbo until Congress acts on the matter.

(10/6/04) Lucent Technologies announced another cut in retiree benefits when it said that it would no longer provide free health insurance for dependents of management workers who retired on or after March 1, 1990, at a salary of $65,000 or more. In September 2003 the company announced a similar type cut but used the figure of $87,000 as the cutoff point. The latest cut will take place on January 1, 2005 and will affect 7,400 dependents of 5,400 retirees. Management retiree's costs for dental coverage will also increase by about one-third.

(10/6/04) IBM has agreed to pay $300 million to partially settle litigation over its pension plan. The company and the plaintiffs also agreed to cap further damages in the suit to an additional $1.4 billion. The agreement between the parties in the lawsuit still requires approval from the federal court in the Southern District of Illinois where Judge G. Patrick Murphy is hearing the case.

Last July, a federal district court ruled that IBM discriminated against older workers when it adopted a cash-balance plan. Three appeals courts have agreed that Xerox's cash-balance plan did not follow pension law when it calculated pension payouts. If Congress does act on this matter it could effect the pension plan changes that were made by over 300 major corporations to cash-balance type plans.

Judge Murphy reaffirmed his previous ruling that IBM owes back payments to 140,000 older employees who were harmed when the company converted its pension plan to a cash balance plan in 1999. The company said it would appeal the judge's ruling. Judge Murphy has yet to decide the amount of the damages in the case.

Judge Murphy had initially ruled that IBM had discriminated against its older workers in several ways when it converted its pension plans. The judge's ruling only dealt with the liability issue, and so the court will now follow up on the question of how to compensate the affected employees. The suit had been certified as a class action, covering about 130,000 IBM workers and retirees in the U.S.

The judge ruled that the conversion was illegal since it discriminated against the older employees in several ways because the changes would leave them with smaller benefits upon retirement than younger workers would have when they retired. IBM changed its pension plan twice since 1995. In 1995 the company switched to a hybrid called a pension equity plan, and in 1999 it converted to a cash-balance plan. Both of the changes took away some benefits from older workers. It also meant that older workers had less time to build up their ultimate retirement income than would be available for younger workers to build up their retirement income.

IBM still expects to appeal two rulings the case but by capping its liability to $1.4 billion, if it wins the appeal it would cost the company only the $300 million in the settlement. The company also said that the settlement won't involve any cash outlay because the payment will be made by its overfunded pension fund. The company had previously estimated that the cost of a loss in the case would run them about $6.5 billion. Under pension law there is no punitive or compensatory damages, so the company therefore would be paying out benefits it has already funded over the years.

Congress is expected to take up changes in the pension laws and how to exempt them from age discrimination laws at this session. Any such legislation that is enacted will be too late to help IBM in this matter since Congress cannot pass an act to reverse a decision of the court system.

IBM claimed that it had been blindsided by a change in the law and thus could not be compelled to make payments for something that had occurred prior to the change in the law. "There has not been a change in the law, " Murphy said. "All that has changed is IBM's clever, but ineffectual, response to law that it finds too restrictive for its business model."

According to David M.Speier, senior consulting actuary with Watson Wyatt, a consulting firm that helped IBM and other companies convert to cash-balance plans "All cash-balance plans would be viewed as age discriminatory" if the ruling is upheld upon appeal. An IBM spokeswoman said the company planned an immediate appeal even before the issue of compensation is dealt with.

The corporate world had hoped that the issue of age discrimination and cash-balance pension plans would be resolved this year by regulations being written by the Internal Revenue Service. The I.R.S's approach has been that not all cash-balance pension plans are age discriminatory if designed to treat older workers fairly.

The Treasury Department had proposed legislation that is aimed at the unfair treatment that older workers receive when companies convert traditional pensions to "cash balance" plans. The proposal would ban the practice of "wearaway," which is a pension limbo for older workers, during which they build up no benefits for months or even years, after their company switches to a cash-balance plan. It would require a five-year "grandfather" period, which means that benefits earned under the cash-balance plan would have to be at least as valuable as the benefits earned under the prior pension plan for five years.

It is unclear whether or not other measures in the Treasury proposal would offset these protections. The proposals also do nothing to change the situation for those workers who have previously had their pension plans changed from the traditional plans to the cash-balance plans If the proposals were enacted it would help employers who recently lost court cases involving this matter. The proposals were contained in President Bush's budget.

The House and the Senate have agreed to postpone any new proposed regulations from the Treasury for cash-balance accounts until at least October 2004. The Transportation Treasury Appropriations Bill specifically bars the Treasury from issuing new regulations on this matter until that date. This represents a victory for employee groups who had strongly opposed the regulations, which were to be sympathetic towards the employer's viewpoint on this matter. Employee groups had feared that the Treasury rulings would have overruled a July decision by a federal district court that IBM had discriminated against older workers when it adopted its cash-balance plan.

The Treasury would also be prevented from issuing rules it has been developing that are widely expected to exclude cash-balance plans from certain pension laws on how employers calculate lump-sum payouts. Cash-balance plan conversions have cut into the pension benefits of older workers since they are not based on the higher earnings that an employee makes in the latter years before retiring. Cash-balance plans provide a small "contribution" each year, which is usually around 4% of annual pay.

Under traditional pension plans, the companies calculate a retiree's benefit based on length of service and amount of annual earnings in the last few years before retirement. Thus most of the value accrues late in the employee's career. Under the cash-balance method for pension plans employers contribute a percentage of each worker's paycheck to a cash-balance account every year, and then guarantee that the money will grow at a certain interest rate. Since younger workers have their money in the plan for a longer time than do older workers, they have more years for the interest to accrue.

In the last several years many of the U.S. corporations have converted from the regular pension plan computation formula to the cash-balance formula which favors the new workers and is a detriment to the older longer term workers. The corporations themselves benefit from the conversion to the cash-balance method of computation, which in turn flows down to the company's bottom line.

In a study of 60 cash-benefit pension plans, the Labor Department's inspector general found that 13 of the plans were underpaying participants by a total of $17 million a year. Extrapolating from these findings, the study estimated that the nation's 300 to 700 cash-balance plans were underpaying workers by $85 million to $199 million per year.

The inspector general's report was made public by Representative Bernard Sanders (Rep.-Vt.), who stated " This report proves that a number of companies are illegally slashing the pension benefits of their employees by hundreds of millions of dollars every single year by shifting to cash-balance plans." The Internal Revenue Service will also issue a report on this matter, since it shares responsibility for enforcing the Employee Retirement Income Safety Act with the Labor Department.

A recent edition of the New York Times contained an article written by Mary William Walsh entitled "An Outsider's Grim Prognosis for Pension Agency. "As its title implies, the article dealt with the precarious position that the Pension Benefits Guaranty Agency finds itself in.

To quote from the article: " An independent analysis of the Pension Benefits Guaranty Agency, made available to the New York Times, suggests that the agency will go broke in 2020 if current financial conditions persist. Even if things improve, so that fewer pension funds fail than in recent years, the agency is still expected to run out of money by 2023."

The article than went on to state: "Any private insurance company under those circumstances would be shut down," said Douglas J. Elliott, the president of the Center of Federal Financial Institutions and author of the new study." If the PBGC went broke what would happen? For those of us old enough to remember when the federal government had to bail out the savings and loan association fiasco in 1989, it cost the federal government over $200 billion to bail out the government. When we write that is over $200 billion to the federal government in reality it is the taxpayer would bore the burden of that fiasco.

The PBGC currently pays benefits to over 1 million people whose pension plans have collapsed. Please keep in mind that many of these individuals are being paid less than was promised under the terms of their plans. The agency covers the guarantee to more than 43 million people so you can see its failure would have to be borne once again by some kind of federal bailout to the system. According to the PBGC more than 1,200 pension plans have been terminated this year, while 1,119 plans were terminated in 2003. Most of the plans that were terminated were not ailing plans. Most of the terminated plans had sufficient assets to meet their obligations.

One of the problems faced by employees whose company has a failing plan is founding out that information. Pension law forbids the PBGC from informing the employees of the fact that their plan is underfunded, even though this information is on file with the agency. Representative George Miller, a California Democrat, has introduced legislation that would allow the agency to disclose the poor financial condition of a plan to the company's workers.

When the PBGC takes over a plan no more benefits can accrue to the employees of that company. The maximum benefit that the agency can pay an employee is $44,386 a year. For high paid employees who retire early, the maximum pension payments are cut 7% a year between the ages of 60 and 65. They lose an additional 4% a year if they retire between the ages of 55 and 59. Retirees already receiving a monthly check could also see a cut in their pension checks.

U.S. Airways, which is in bankruptcy court again announced that it is considering abandoning the pension plans for its flight attendants and mechanics that cover over 25,000 employees. In a filing in the U.S. Bankruptcy Court in Alexandria, VA said that it could not survive if it had to make over $531 million in contributions to these pension plans in the next five years. It also told the court that it would not make the $110 million contribution that was due to its plans in September 2004

The company also said in the filing that it would seek to reduce retiree medical benefits to save $87 million a year. Before it can abandon the plans it must convince the court that it would not be able to reorganize successfully and exit court protection unless it is allowed to abandon the plans. Although you have seen many articles about the doom that this will create you have to keep in mind that most companies are going concerns and will not abandon their pension plans. If a plan is over-funded the company must pay an excise tax on the surplus, which takes away the financial incentive to dump the pension to nab the surplus cash. Pension figures that are submitted to the SEC include liabilities for executive pensions. Because pension assets aren't used to pay for executive pensions (which are paid from cash flow or from special protected trusts) the result is that pension plans appear more under-funded than they really are.

Pilots at U.S.Airways gave back about $566 million worth of cuts in 2002 and 2003. Last year the company replaced the pilot's pension plan with a less generous one. The company is now contemplating abandoning even that plan, which was under-funded by about $2 billion, That pension plan combined a traditional defined-benefits pension plan with a 401(k) program to which employees contributed. U.S.Airways in now offering a profit-sharing plan to all its union employees, but this can take a while till it becomes a reward since the airline is operating at a loss this year and it may not have a profit next year also.

UAL Corporation, which is in bankruptcy, under an agreement with the Labor Department, nominated Independent Fiduciary Services Inc.as an independent trustee to represent the interests of 120,000 of its employees and retirees participating in its four pension plans. The trustee must be approved by both the bankruptcy court and Elaine Chao, the Secretary of Labor before September 15, which is the date its next pension contribution is due to be made. IFS vice president Samuel Halpern will lead the UAL group. IFS will be paid$175,000 for the first three months of work and $50,000 a month thereafter.

A federal bankruptcy court judge gave United Airlines another 30 days to come up with a restructuring plan. Judge Eugene C. Wederoff also approved a bankruptcy-financing plan arranged by United in July after its bid for federal loan guarantees was rejected for the third time. Two of United's unions and the federal Pension Benefits Guaranty Corporation (PBGC) filed objections to the debtor-in-possession financing that United had arranged in July with Citibank, J.P. Morgan and the GE Capital Corporation.

United's lawyers acknowledged that the decision to halt pension contributions was made by management in early July, and was not done as a result of a request from the lenders. It was also acknowledged that the company based its business case for the debtor-in-possession financing on the assumption that it would not finance its pensions while it remained in bankruptcy.

U.S.Airways, which is also faced with the threat of bankruptcy, said that it would ask the government for permission to stretch out $67.5 million in contributions it owes its pensions for its mechanics and flight engineers. The airlines which came out of bankruptcy in April 2003, is also seeking $800 million in wage and benefit cuts from its unions, on top of two sets of concessions granted in the bankruptcy

Under federal law, the I.R.S. can give a company up to five years to make up the payments it owes for a single year. In return the I.R.S. can ask for security to secure the waiver from the company. Congress passed legislation that allows airlines and steel companies to stretch out the payments for two years.

In a filing with the Securities and Exchange Commission UAL Corp. disclosed that the cost of its pensions fell 46% in the first half of 2004, to $250 million from $455 million compared with the first half of 2003. It also disclosed that the cost of its retiree medical programs fell 50% to $114 million from $226 million compared to the first half of 2003.

United also claimed that under the terms of its recently obtained financing it could not make two pension contributions that are due this fall for about $575 million. The PBGC has filed a motion in Federal Bankruptcy Court in Chicago claiming that the provision in the loan agreement is illegal since it would require the company to violate the federal pension law.

All companies that promise traditional defined-benefit pensions must set aside enough money to pay the benefit, and must do so according to a regulated schedule. The PBGC also said that the total shortfall in the company's pension plans had grown to $8.3 billion. This matter is likely to go to the Supreme Court of the U.S. for a determination as to whether a not employees who are covered under pension plans have any greater rights to the assets of a bankrupt company than do any of the other unsecured creditors.

The company said the pension costs declined primarily due to the lower employee pay and lower pension formulas for pilots and flight attendants, and because the company took a curtailment charge in the first quarter of 2003. The liability for its pensions declined by about $100 million to $12.8 billion as of June 30, 2004 from the end of 2003, and that the assets remained essentially unchanged at $6.9 billion.

The "cost" is an accounting measure of how much retirement liabilities affect a company's income in a given quarter. It does not reflect scheduled cash payments the company has to make to its pension plans.

The PBGC took the unusual step of making public a letter that it had sent to United Airlines in which it stated that the company would be acting illegally if it halted making contributions to any of its 4 pension plans for its employees. The letter, which was signed by Bradley D. Belt, the pension agency's executive director warned that keeping the plans alive without contributing to them "increases the risk of loss to the plan participants and to the federal pension insurance program."

In the letter sent to Glenn Tilton, chairman and chief executive of the airline, Mr. Belt stated that failure to make the payments would be "contrary to public policy" and inconsistent with the Internal Revenue Code and the Employees Retirement Income Security Act.

The unfunded obligations rise because the employees continue to build their benefits, even though the company has stopped setting aside the money to pay them." When a company shuts down a pension plan it is required to give the employees and the federal government 60 days' notice. The company has 12 directors on its board, two of whom are leaders of their unions also.

Randy Canale, president of the International Association of Machinists that represents 20,000 ramp workers and customer-service agents at the airline refused to attend the meeting the company held to discuss its intentions. Capt. Mark Bathurse, chairman of the pilots union attended the meeting.

United Airlines announced that it would not make any further contributions to any of its four employee pension plans while it remains under bankruptcy protection. The flight attendants had previously agreed to pension reductions, and have also seen the company renege on its promise to continue to pay the health benefits costs for attendants who accepted the company's offer to take early retirement.

Terminating a plan is a draconian measure for even a company in bankruptcy and it does require the approval of the bankruptcy court, but doing so is legal. If the company defaults in making any payments to the pension funds it will mean that the federal Pension Benefits Guaranty Corporation (PBGC) will have to take over responsibility for the plans. This means that some of the retirees could see some steep cutbacks in the amount that they receive under the plan since the government payout could be much smaller than called for under the plan. This would be especially true for the amount that the pilots would receive. The government insurance generally covers a maximum of $44,386 a year.

The PBGC can apply to the bankruptcy court to try and obtain some additional assets of the company, or the company's workers can also apply to the court to try and block a default by the company. A spokesman for the PBGC, Randy Clerihue said that a default on a scale of the one from United would be unprecedented in the history of the agency. The pension agency has calculated that it would be liable for about $5 billion of the $7.5 billion needed to pay the pension benefits for people covered under the plans.

Please keep in mind that the PBGC had to take over $9.4 billion in guarantees from steel companies that went bankrupt or failed to make payments towards their retirees pension plans. The PBGC recently estimated that it had just classified $23.4 billion worth of airline pensions as "reasonably possible" to default.

United has disclosed that it has contributed $127 million to its four pension funds this year. It has skipped the $72.4 million payment that it was due to make to 3 of the plans at the end of June. It must contribute $92 million, some by October 15^th, and is scheduled to make another payment of $404 million on September 15^th to complete the contributions that it owes for 2003. The quarterly payments are due to be paid through 2005, and were scheduled to increase after the expiration of the two year exemption from payment granted to the airline industry by Congress recently.

The company had reached an agreement with its unions on a plan to cut health care benefits for 58,000 retired workers and their families. The plan will be presented to a federal bankruptcy court in Chicago for approval. The agreement was negotiated with a coalition of unions representing flight attendants, traffic controllers, ground workers and other employees. The company presently employs 62,000 people.

United had contended that because of its dire financial situation, it could not continue to afford the cost of the health care benefits for the retirees. The flight attendants contended that United had broken a promise to maintain the benefits to 2,500 of its members who accepted an early retirement package that included a promise to protect their health benefits after retirement.

United's argument for breaching the agreement was that the promise to protect the benefits existed only until a change was unavoidable. In March 2004 a court-appointed examiner found that United had not violated its contract with the flight attendants. The agreement does not require a vote by union members because retirees are not covered by collective bargaining agreements.

This action follows in the footsteps of other companies that have abrogated the health benefits of their retirees once the company goes into bankruptcy. Included in the list of companies that have undertaken a similar course of action are Kaiser Aluminum, Polaroid, Bethlehem Steel, National Steel and Federated Department Stores.

Judge Eugene Wedoff of the U.S. Bankruptcy Court in Chicago granted a request by the Ass'n of Flight Attendants and the International Ass'n of Machinists and Aerospace Workers to appoint an examiner to report back to him within 30-days on United Airlines actions on retiree health care benefits. United Airlines is a subsidiary of UAL and the nation's second largest airline behind American Airlines.

The examiner in his report back to Judge Wedoff cleared UAL of the charge of fraudulently misleading about 2,500 flight attendants about their health benefits after accepting the company's offer on early retirement. The examiner also found that there was no financial incentive to the company to get the flight attendants to accept early retirement in respect to their health benefits.

United filed for bankruptcy protection in December 2002. United maintains that it never gave up its right to reduce retiree's benefits, which it can ask to do under the bankruptcy law. The company had hoped to emerge from Chapter 11 bankruptcy by the end of June 2004. United's four pension plans cover 134,000 active and retired employees.

Last year the company received about $2.5 billion a year from concessions from its employees. Please keep in mind that the company was an employee-owned one before it sought protection from its creditors under the bankruptcy law.

Unfortunately a growing trend emerging for corporate America is to cut back on the pension and health care benefits of its employees. A classic example of this trend is shown when UAL Corp.'s United Airlines announced recently that it hoped to shift more of the costs of its medical benefits expense over to its 35,000 retirees, either through negotiations or by asking a bankruptcy judge to impose changes on the group. A company in bankruptcy can cut back on employee benefits and more and more U.S. companies are using this route to either reduce retiree benefits of have the retirees pay more for their retirement benefits.

Pete McDonald, executive vice president of operations for the company, said that it hoped to reach agreement with representatives of its retired workers. If these talks fail the company would file a motion with the bankruptcy court that would allow it to impose the modifications. Officials of the Association of Flight Attendants angrily denounced these possible moves since the company recently "enticed" more than 2, 500 attendants to retire last summer by pledging their medical benefits would be protected. The International Association of Machinists union, which represents 20,000 ramp workers, customer-service agents and reservation clerks said its lawyers would oppose any changes on the medical benefits of the retirees from the union.

United had stated that unless it gets some sort of break on it pension contributions it would be forced to renegotiate contracts with its unions, which have already granted significant concessions. If the unions refused to grant any concessions, the company would then have to ask the bankruptcy court to cancel its pension plans and replace them with new plans. United has disclosed to the bankruptcy court that it has to contribute $4.8 billion to its pension plans over the next five years. United would like to work something out, so that it would only have to pay in about $1 billion a year for the next four years, and about $500 million in the fifth year.

As of last April, United's pension plans were $7.5 billion short of the amount needed to cover all claims. If United made some of the smaller contributions it is now asking to be allowed to make, the PBGC could be left holding the bag to the amount of $5 billion. When the corporation recently had to take over Bethlehem Steel's pension obligations it amounted to the previous record high hit of $3.7 billion. Many of the Congressmen from states wherein they represent some of the new smaller airlines feel that the government should not have to bail out the large airlines from their present obligations. They argue that it would be setting bad precedent.

Companies are allowed to request up to three exceptions in any 15-year period in making payments to its pension plans, and only the IRS can grant the exceptions. The exception is supposed to be granted only when a company can show a "temporary substantial business hardship." It is unprecedented for a company to request all three waivers at the same time. Companies are also required to post business assets, as collateral to secure what is, in effect a debt to the pension plan. United does not have any other assets to post since they have already been used as collateral for other loans.

In a classic case of scare tactics, GM released information to the media declaring that its 10-K filing with the SEC showed that its future health care obligation for retirees rose last year to $63.4 billion, from $57 billion in 2002. The company went on to also say that if it were not for recent changes in the new Medicare legislation its obligations would have risen to $67.5 billion.

We would like to point out however that GM is using a lower discount rate in its latest 10-K to calculate the present value of its future retiree health-care obligations. The lower the assumed discount rate that a company uses, the greater the assumed present value of the future retiree health-care expenditures. Most economists feel that you will see interest rates rising in the next few years. When this rate rises it will lower these projections by many billions of dollars.

According to GM, health care costs represent about $1,400 per vehicle produced. For the year 2003, the company reported that it spent $4.8 billion, or about $3,966 per employee for health-care benefits. The company put $5 billion into a tax-free trust that it uses to finance future retiree health care costs in the first quarter of 2004, compared to the $3.3 billion it put into the trust fund in 2002. Of course GM did not have the funds available to put into the fund at that time in 2002, and the discount rate was much higher at that time.

Labor Secretary Elaine L. Chao named Bradley D. Belt to be executive director of the Pension Benefit Guaranty Corporation. Mr. Belt replaces Stephen A. Kandarian, who resigned in January 2004. Mr. Belt is an attorney and finance specialist who has held a number of private and governmental positions in Washington. President Bush had appointed him in 2003 to the Social Security Advisory Board. From 1996 to 1998 he was executive director of the National Commission on Retirement Policy, a bipartisan group convened by the Center for Strategic and International Studies to examine the Social Security system and develop legislation to improve it.

The PBGC, which insures the private pensions of about 44 million Americans, said total underfunding at companies with shortfalls of $50 million or more dipped to $278.6 billion in 2003, from $305.9 billion in 2002. Thus the underfunding of pensions with severe shortfalls decreased by about 9% last year. This was mainly due to improved stock market conditions.

The PBGC has proposed a revised penalty system for companies that fail to notify workers about their underfunded retirement plans. The revisions would impose fines based on the number of plan participants rather than how late the company's participants are notified of the underfunding.

The new proposals would not apply to administrators of underfunded plans that might be penalized under the new systems for the years 2002 and 2003 if they participate in a correction program and issue correction notices by the reporting deadline this year. The official deadline date has been not been determined as of yet.

Failure to make timely payments under the present law has varying penalties, but the basic penalty is $25 per day for the first 90 days and $50 per day after that. The new policy would impose a basic penalty of $5 per plan participant.

The PBGC announced in April that its deficit had grown to $5.4 billion and that it had "reasonably possible claims" of $35 billion as of the close of its last fiscal year. A corporation is considered a "reasonably possible" claim if the corporation has a lower than investment grade bond rating.

The Equal Employment Opportunity Commission approved a rule that would let employers reduce or eliminate company health benefits to retirees eligible for Medicare. The proposal must be commented on by several other agencies and reviewed by the Office of Management and Budget before it can take effect. The rule was approved by a 3-1 vote, with one commissioner absent. A federal appeals court had ruled in 2000 that such age-based distinctions were unlawful.

The rule creates an explicit exemption to the Age Discrimination in Employment Act of 1967. If upheld the proposal would allow a company to eliminate health coverage for retirees when they become eligible for Medicare at the age of 65. There is no law that requires employers to provide health benefits to employees or retirees. It is legal for an employer to provide health benefits for active workers but not for retirees.

The commission said that under the act it had the authority to make "reasonable exemptions" to the law in the public interest. In allowing an employer to drop the Medicare eligible retirees from coverage, the company doing same, could therefore continue with such coverage for its active employers whom it might have had to drop because of the difficult economic times the company might be undergoing.

The proposal stems from a long running battle between some unions and some employers over a lawsuit involving Erie County, Pa. A federal appeals court had ruled in 2000, that the county had violated the Act because it offered a different level of benefits to Medicare eligible retirees that to early retirees.

The problem did not abate in the two industries that had the most serious shortfalls, namely the airline and the steel industries. Companies in these two industries have accounted for more than 70% if the claims against the PBGC since its formation in 1974. Companies with pension liabilities of more than $50 million at the end of 2003 were required to file special reports to the agency by April 15, 2004.

The Pension Benefits Guarantee Corp. announced that the size of its deficit had increased from $3.6 billion a year ago to $11.2 billion by the end of 2003. The agency had 37 percent of its nearly $35 billion in total assets in stocks at the end of its last fiscal year, ended Sept. 30. It investments earned nearly $3.3 billion for a return of 10.3 percent. That was more than enough to cover the $2.5 billion it paid out to retirees who it covered last year.

About half of the agency's total investment portfolio comes from the companies that default on the pension obligations. When that happens the agency takes over whatever assets are left in the defaulted company's portfolio. Those assets combined with the assets of other defaulted companies are used to pay individuals who have defaulted pensions covered by the agency.

The agency has a separate investment portfolio solely in fixed-income securities. The money received from the premiums of the companies included in the coverage of the PBGC is put into this pool of funds. The investment requirement decisions for this fund are set by the agency or its board, which consists of the secretaries of the Treasury, Labor and Commerce Departments.

Even though the House had passed a pension relief bill, the Senate failed to act on the bill that was pending before that legislative body at this session. Companies that offer pension plans are now operating under an interim break that will expire unless Congress acts by April 15, 2004. The Bush administration has expressed opposition to any far-reaching pension relief that would be excessively broad or that granted special breaks to individual companies or specific industries. It would however not oppose pension relief it is were limited to two years and treated all companies the same.

Under present pension law companies with severely eroded pension plans would be required to infuse them quickly with large amounts of cash. Under the Senate proposal companies with such plans would be required to put in only 20% of the required amount for the next two years. The fear exists however that if you allow this to occur, the Pension Benefits Guarantee Corporation (PBGC) will be stuck with a larger bill if these companies fail. "Giving a special break to weak companies with the worst-funded plans is a dangerous gamble, " stated Steven A. Kandarian, former executive director of the pension agency.

The PBGC is about $350 billion short if it had to pay all the pensions it is responsible for immediately. Although the recent strength in the stock market has alleviated some of this problem it takes several years before it will hit the bottom line for the pension obligations. In order to try and help this situation many experts have recommended that the 30-year Treasury bond, with its low yield be temporarily replaced with a corporate bond index with a higher yield for pension fund calculations through 2005. The PBGC finances its insurance program by charging premiums to all companies that offer pension plans. It has not raised premiums since 1994.

The PBGC's income from premiums has been falling every year since 1996, in adjusted dollars. With the increase in bankruptcy filings and the decline in the stock market over the last few years it is feared that the healthy companies face a huge increase that they will have to pay premium wise to the fund. It is feared that many companies will drop their pension plans for new employees.

Companies are expected to contribute $65.5 billion into their pension funds in 2003, compared with the $6.4 billion they contributed in 2000. If the matter is not addressed by this pending legislation they will have to contribute over $125 billion in 2004. Steven Kandarian, executive director for the agency said that he feared that by easing the demands on companies too much, the legislation would put the pension funds themselves at risk. With more failures having occurred recently the PBGC has had to assume more of the risk for payment to retirees of failed companies.

David M. Walker, the comptroller-general who heads the General Accounting Office, which is the investigative arm of Congress testified before the House committee on Education and the Workforce that the Pension Benefits Guaranty Corporation (PBGC) is being placed on the governments "high risk" list. The PBGC is the federal agency that insures pension plans.

Steven Kandarian, the former executive director of the PBGC gave a speech in which he foresaw a possible "general revenue transfer" in order to save the solvency of the corporation. This is a diplomatic way of stating that the agency may need a bailout similar to the one that had to be utilized to save many saving and loan guarantees several years ago by the government. At issue are defined-benefit pensions which is the type where the employers set aside funds years in advance to pay workers a predetermined monthly amount upon retirement till death.

The U.S. Supreme Court has ruled that employer-financed pension plans cannot change the rules to deny benefits to two Illinois construction workers who took early retirement with full pension benefits. This ruling applies only to private-sector workers covered by group pension plans. Group, or multi-employer, benefit plans are common in industries like the construction, trucking, mining, retail and manufacturing industries. According to the latest federal figures available there were about 9.5 million people covered by such plans in 2002.

In this particular case the two Illinois workers, Thomas Heinz and Richard Schmitt Jr. were 39 when they retired in 1996. Under the rules of their pension plan, they were permitted to draw retirement benefits as long as they did not take on certain jobs in the same industry. Both men took on new jobs as construction supervisors.

Under the then existing rules it was permissible for them to take this job and still collect their pensions. The Central Laborers' Pension Fund changed the rules in 1998 so that the men would no longer be able to collect their pensions and continue to work at the jobs they were working at. The unanimous opinion of the U.S. Supreme Court was that the rules could not be altered to retroactively deny the men their pensions.

Medicare covers about half of the average person's medical expenses, and companies have been slowly chipping away at the retiree benefits of their former employees. A study by Watson Wyatt Worldwide, a benefits consulting firm in Washington, estimates that the level of employer financial support will drop to less than 10% of total retiree medical expenses by 2031, in spite of the tax benefits created under the new Medicare prescription drug law of 2003

Even under those plans that now cover most of the employee retiree health costs changes are just over the horizon for these plans also. According to a survey from Mercer Human Resource Consulting, the average retiree medical plan costs in 2003 rose 14.3% for pre-Medicare-eligible retirees and 11.25 for Medicare-eligible retirees. Nearly four-fifths of sponsors reduced retiree benefits in 2003, and nearly two-fifths say retiree now pay the full cost of coverage under their plan.

According to the Employee Benefits Research Institute, a nonprofit research group in Washington individuals without an employer-sponsored plans who retire at 65 and live to 80 will need to have saved about $80,000 to cover medical expenses. This estimate is based on a moderate increase of about 7% a year over the 15-year period of time. These expenses can soar even more if you need to pay for nursing-home care, home-health care or any assisted living expenses.

A new rule released by the Financial Accounting Standards Board requires that companies record the amount that they expect to receive as subsidies under the Medicare law to be amortized into income over the average working life of their employees, and not as a one time gain. In recognizing the 28% subsidy as a one-time gain a company can get a big boost to its bottom line. The new guideline will take effect for fiscal periods beginning after June 15 for publicly traded companies. A company is entitled to receive the subsidy in its tax return if it continues to provide drug coverage for employees and retirees who are eligible for Medicare prescription drug coverage under the new law. The purpose of the subsidy is to encourage companies to maintain the drug coverage for their older employees and retirees.

In a pretrial ruling, U.S. District Judge John P. Fullam decided that the Allstate Insurance Co. did not commit age discrimination in 2000 when if forced about 6,400 of its agents to become private contractors with limited benefits. In a class-action suit, a group of the agents had alleged that the 6,400 agents affected by the reorganization had a median age of 50, and were the victims of a policy that unfairly targeted older workers.

In his pretrial ruling Judge Fullam declared that there wasn't any basis for the age-discrimination claim "for the simple reason that employees of all ages were treated alike." The U.S. Equal Employment Opportunity Commission had joined the complaint. The judge did rule that the company had improperly required the agents to sign a release giving up their rights to sue the company in exchange for staying on as independent contractors or leaving and receiving severance pay and other benefits.

In the complaint the agents accused the company of age discrimination because 90% of those involved were over the age of 40. The judge based his ruling negating the releases on a section of the federal law entitled " the Older Workers Benefit Protection Act". He said the releases "on their face violate the law."

Under the terms of the new pension funding law, companies would be allowed to use a higher-yielding corporate bond interest rate rather than the 30-year treasury bond rate. This higher rate helps companies since the present value of its pension assets would be lifted. This in turn would mean that they had to make lower contributions to meet their pension fund obligations. The airline and steel industry would get targeted relief in how much they must contribute to meet the deficiencies in their plans over the next two years. The White House supports the new corporate-bond rate.

A recent study by Mercer Human Resource Consulting showed that many companies have either been cutting back or even eliminating retiree benefits over the last few years. The survey of about 3,000 employers found that only 21% still offer medical coverage to Medicare-eligible retirees, down from 46% ten years ago. Just 28% offered coverage to early retirees, compared with 46% ten years ago. Many employers have also established ceilings on the amount they will spend each year on an individual retiree.

According to the results of study done by the Kaiser Family Foundation, a non-profit health care group, and Hewitt Associates, a benefit consulting firm, almost 10% of the 408 large employers surveyed said they decided to eliminate subsidized health benefits for future retirees. Seventy eight percent raised the share of premiums paid by current retirees who are still covered. The survey of the 408 companies included only those companies that employed 1,000 or more employees.

In an interesting development in the pension area, three major German companies have disclosed plans to cut pension benefits for their workers. In the case of one of the companies, Commerzbank, the company did not even consult with its workers before announcing the change, which is highly unusual in Germany. The three companies are Commerzbank, Gerling, an insurance company and Schering, a pharmaceutical outfit.

According to a spokesman at Gerling, the workers agreed to the cut because of the financial difficulties that the company has been experiencing over the last several years. The cuts in pension benefits will lead to some higher-paid workers seeing cuts of up to 50% in their company-paid pensions.

Workers hired by Commerzbank, a large German bank after 2005 will receive no pension from the company. Workers now with the company will receive benefits already earned but will not accrue additional benefits. Details of the new plan at Schering would be set after discussions with the workers. The German government had previously enacted its Agenda 2010 economic package that made modest changes in the state pension plan, which is similar in concept to the Social Security system in the United States. German officials further indicated that they hoped that the workers "would take more responsibility for their own retirement."

With the Dow Jones being up about 24% and the NASDQ being up about 45% in 2003, pension funds of U.S. corporations have regained a lot of relief from being greatly underfunded as they were at the end of 2002. You do not have to look any further than GM to see what a difference a year makes. At the start of 2003, GM's pension plans were about $19.3 billion underfunded. Thanks to a $13.5 billion bond issue, the improvement in the market and an expected $4.1 billion contribution from the company because of the sale of its Hughes Electronic Co. subsidiary, the pension shortfall will narrow to about $400 million by year end. The company is using a 9% figure as its estimate for the return that it can earn in the pension funds, and a discount rate of 6.25%, the company estimates that it will free up about $3 billion a year beginning in 2004.

This of course brings up an interesting point… i.e. what if the company does not earn 9% in its pension funds… does the same problem came back to haunt them all over again. By law employers are required to invest pension assets prudently. If the pension fund loses money or does not make the expected rate of return the company will eventually have to make up the difference. Or there is another side to this matter also. What if the employer decides to invest the asset of the pension fund in riskier venture, so that it can enhance the return for the pension fund.

The degree of risk that a pension can take to enhance the return will not come home to roost for several years in the event the plan does not make the "assumed rate of return". The employer has another option available in the event the pension plan does not make the "assumed rate of return". The employer can cut the pensions of its employees. This is what happened recently in the Kaiser Aluminum bankruptcy case. The government had to cancel the plan when departing employees pulled so much money out of the plan, the government had to step in to protect whatever assets were left for the remaining employees.

In the Kaiser case, 231 salaried employees took $77 million out of the pension plan in 2002 in one-time payments, known as lump sums. Up until 2002 the pension plan had been paying all retirees about $37 million a year. When Kaiser filed for bankruptcy in February of 2002, those employees who could take lump sum pension opted to do same. When the company told the employees that they could no longer take lump sum withdrawals the plan only had 21 cents left for every dollar it owed in benefits. This left a short fall since the PBGC covers only a lower amount of payments to the employees. The Kaiser plan owed $339 million in benefits to about 5,000 people and had just $71 million in assets left available for the employees. The government was thus forced to cancel the plan.

This was somewhat similar to the Bethlehem Steel bankruptcy situation but on a much smaller scale. At the time of its bankruptcy Bethlehem owed $7.8 billion to about 95,000 workers and retirees, and had just $3.5 billion in assets available to be distributed to them. Bethlehem had about 45 cents available in its pension plan for every dollar it owed its workers. There is a rule that requires companies to keep assets worth at least three times the previous year's payout in pension funds available, but the run made by the employees taking lump sum distributions showed that this rule was in fact valueless in this situation. The rule requiring a company that has a badly underfunded pension plan to make quarterly payments to the fund proved of not value in this situation also.

The Xerox Corporation announced that it had agreed to settle a lawsuit over the way it calculated pension benefits by paying an additional $239 million for thousands of employees who retired from 1990 to 1999. The proposed settlement is contingent on court approval. Thus the company will not appeal the decision that was rendered in August by the U.S. Court of Appeals for the 7^th Circuit. The controversy arose when some older workers discovered that they had been stripped of higher payouts when the company converted to a cash-balance plan. These employees brought the suit based on allegation of age discrimination law violations. The Xerox case has involved a different cash-balance pension issue than the one involved in the IBM case, since it dealt with how companies with cash-balance plans must calculate the benefits they pay retirees.

Most cash-balance plans allow a retiree to take his benefits as a lump-sum payment. Under traditional pension plans the norm is for the retiree to take an annuity payment, beginning at the age of 65. When Xerox employees retired before the age of 65 the amount shown as the lump-sum should have been converted to what it would have been worth as an annuity payment. Once that amount is determined it should have then been recomputed as a lump-sum payment.

Lucent Technologies, the telephone-equipment maker said it would stop reimbursing management retirees and their dependents for the cost of some Medicare premiums starting in 2004. The company will no longer pay for dental coverage of those retirees. It is just another example of a company cutting back on health benefits that if promised to pay for its retirees.

Another example of the cutting back on health benefits to both present employees and retirees is the imposition of surcharges and restrictions on benefits as the employers seek to curb their costs for these benefits. Some companies are raising the premiums depending on the number of individuals in a family. G.E. is one of the companies that will charge more in premiums for employees with larger families. This "tiering" of family plans is being reflected when an employee who earns $45,000 must pay $14.84 per week to cover a family of three or more versus $11.78 per week to cover a family of two. That employee would currently pay $8.71 per week to cover a family of any size.

Some other companies are adopting "incentives" to push working spouses off their health plans and onto the health plan of the company for whom they work. Verizon Communications imposes a $40 monthly fee for employees whose working spouse declines comparable health coverage at their own company. The Kaiser Family Foundation found that 33% of workers elected to take family health coverage through their own company in 2003 which was down from 395 just two years ago.

The Labor Department announced that it would allow Northwest Airlines to use stock in a regional airline subsidiary to help cover the $1 billion shortfall in its employee pension plans. The action has been approved by the department's Employee Benefits Security Administration, and it will allow the company to fund three of its pension plans with $223 million of the stock to meet its 2002 pension obligation.

Federal rules generally bar companies from contributing the stock of subsidiaries to their pension plans. In the case of Northwest, the stock is that of Pinnacle its wholly owned subsidiary for which there is no public market. Northwest had pension funds of $4.4 billion as of January of this year, but that was about $1 billion less than needed to fully fund the pension plans. Northwest has about 73,000 retired and current employees. The exemption was opposed by some of Northwest's unions.

The Labor Department has issued only about 6 such exemptions in the past, with the most notable of the exemptions occurring when GM was allowed to contribute about $6 billion in stock from its Electronic Data Systems subsidiary in 1994.

According to a recent study, the number of people retiring with health insurance from their employers has dropped significantly since 1996. In addition to this fact we are faced with the fact that many companies are cutting back on the health benefits of their retirees, even though they previously had promised to cover them for life.

The study was conducted from interviews with Medicare beneficiaries from the age of 65 to 69 years old. The results appear on the Web site of Health Affairs, an academic journal. Bruce Stuart, one of the study's authors feels that the findings show the importance of any legislation that may emerge from the conference committee now meeting in Congress that will effect this matter. Mr. Stuart is the executive director of the Peter Lamy Center on Drug Therapy and Aging at the University of Maryland School of Pharmacy.

Many employers are also dropping spousal coverage for drugs as part of their health plans for their employees. The study also found that the percentage of younger Medicare beneficiaries with coverage fell to 39% in 2000, from 46% in 1996. Thus we see the greater importance to structuring any change in Medicare coverage for prescription drugs so that employers do not drop coverage under their employee's health plans.

Xerox Corp. lost its appeal in the Seventh Circuit based in Chicago of the ruling in the U.S. District Court for the Southern District of Illinois that held that the company had miscalculated the pension payouts in its cash-balance pension plan. As a result the company will have to pay more than $270 million to 13,000 former employees whose employment ended between 1990 and 2000. Xerox said that it would ask for a rehearing of the matter.

The judges refuted a key defense of employers, that cash-balance plans aren't pension plans that should be subject to the usual pension regulations because they are "hybrids" that are modeled on 401(k) plans controlled by employees. Judge Richard Posner, one of the three-member panel in the Seventh Circuit Court of Appeals stated: "For 'hybrid'….'read 'unlawful'." The win for the employees could impact the pending litigation at AT&T Corp. and Cigna Corp. on similar matters.

The Employees Benefits Security Administration, a division of the Labor Department announced that retirement sponsors could pass along certain administrative expenses of retirement plans to the individuals in the plans. These expenses are related to the processing of requests and calculating benefits under defined-contribution plans. Prior to this announcement plan sponsors always knew they could pass along some costs of the plans, but not on a per participant basis.

Although the plan sponsor had to bear the cost associated with the creation of the plan, many of them opted to pick up the administrative costs of the plans also. The items that can be charged on a per-participant basis include hardship withdrawals, calculation of benefits, distribution checks and forms processed to provide benefits for divorced couples.

Under a decision made by the private sector Financial Accounting Standards Board, Norwalk, Conn., which is subject to change, companies would be required to disclose the impact, in dollar amounts, that the various parts of their pension plans had on each quarter's earnings. Under current practices the financial statement contains this information only on an annual basis. Companies would also be required to disclose how much money they expect to put into their corporate pension plans' trust accounts. The projections would be made annually, subject to change if a substantial change were made in the estimate on a quarterly basis.

In an interesting development that is occurring at the International Ladies Garment Workers Union retirees are contesting the decision made by the union to cut their life insurance policies to $5,000 from the $100,000 to $250,000 that had been promised to many of the retired officials of the union. Officials of the union say they are confronted with a $10 million deficit, and need to take drastic steps to stay afloat. By cutting the value of the policies the union said that it could save about $2 million a year. The union's lawyer said that life insurance was not a vested benefit, and that the union reserved the right to change the policies.

According to Watson Wyatt, a benefits consulting firm, 67 of the country's largest companies have promised more than $1 billion each, $332 billion in total, to current and future retirees for health care. Many of these companies now claim they can not compete with new domestic companies and foreign companies that do not have to bear such large expenditures. Thus they will continue to look for ways to reduce these expenditures.

As an example of this we take a look at the announcement from Whirlpool Corp. that it was establishing company-financed health care accounts to reduce the cost of its retiree's medical plan. Under the new plan, the company will contribute to an employee's retirement health care account each year beginning at age 40. After retirement, the account will pay 80% of the cost of medical insurance, with the employee paying the remaining 20 %. Current employees will have the choice of two new health plans that require contributions and offer more comprehensive coverage, or they can elect to stay in basic no-cost plan. The changes require approval from the union. The new plan would become effective in January 2004.

A Credit Suisse First Boston report estimates that the pension obligations for companies in the S&P 500 stock index have grown about 10% this year, outpacing the growth in the plan assets. The report went on to estimate that the funded status of pension plans will deteriorate by $95 billion this year, based on a 0.79 percentage-point decline in interest rates. Earlier this year the company had estimated a $37 billion improvement since it had assumed a 25 basis point increase in interest rates this year.

The Financial Accounting Standards Board has agreed to require enhanced pension-fund disclosures in a company's financial statements. The FASB hopes to issue final rules for the disclosure requirements by year-end. The new requirements would include a description of the types of investments held by the pension plans, including estimated rates of returns for each type of asset held by the plan.

Included in the allowable investments for a pension plan are stocks, bonds and real estate. The companies would be required to estimate the period over which benefits would be paid to the beneficiaries in the plan, as well as how much they expect to contribute to the pension plan next year.

General Electric and its two national unions have reached an agreement that was approved by the union on a new labor pact. One of the key issues involved in the negotiations was how much of an increase employees would be paying for their health-care coverage. The union's president Ed Fire stated: "The significance of these negotiations is the health care issue." The contract was due to expire on June 25. The union, the International Union of Electronic Workers of America-Communications Workers of America (I.U.E.-C.W.A.), and the company's other large union staged a two-day walkout over the health benefits issue in January. The terms of the contract weren't disclosed, but they will be extended to cover 12 other unions.

Although the exact details of the agreement have not been made public, a few details have leaked out. A single employee, making between $37,500 and $50,000, would pay a health-care contribution in 2004 of $4.49 a week, up from the$2.96 that the employee would be currently paying. A married worker making the same amount would contribute $11.78 a week, compared with the $8.71 he is now contributing a week. Contributions would again increase on January 1, 2006.

Officials with the company and the union said the other main issues in the talks were pensions and job security. The union's membership has fallen from 88,500 in 19699 to 14,000 today as a result of automation, downsizing and moving operations abroad. The other main union involved in the negotiations is the United Electrical Radio and Machine Workers of America, which represents about 3,000 workers.

G.E. officials said the company's health care costs increased to $1.4 billion in 2002, from $965 million in 1999, an increase of 45%. Union leaders said that the company wants the workers to shoulder 30% of health care costs, up from 19% at present. This is an issue that no doubt will become one of the leading issues in all contract negotiations between labor and management in the coming years. Health care costs are zooming and companies want labor to bear a greater proportion of this increase then was the case in the past.

A bill is pending in the House of Representatives that would allow companies to assume that their blue-collar workers will on average die sooner than pension plans now assume they will. Since that would mean that the companies would not have to pay pension obligations to their blue-collar workers for as long as the law now assumes, these companies would contribute less money now to their pension funds.

Edwin C. Halstead, chairman of the actuarial panel that developed these numbers stated that the corollary to this was the fact that white collar workers, who were living longer than present pension obligations assume, would therefore require that more money be set aside by their employer's pension plan to properly calculate the amount that should be contributed to their pension funding.

Congress required that all companies pension plans use the same mortality table, or set probability factors for death rates in 1994. The table that was utilized at that time was established in 1983. The Society of Actuaries, a professional group that engages in research and education, convened a committee to prepare a new table, based on current demographic trends. Mr. Hastead was made chairman of the committee. The committee also concluded that income level was also an important factor in worker's longevity of life. The higher the income the more years a person is likely to live. So far income has not been introduced as a factor in the longevity tables.

Many companies with under-funded pensions are also trying to change the law so that they can contribute stock instead of cash into their plans. The airline industry is seeking legislation that would allow commercial airlines to put off making catch-up contributions to their under-funded pension plans for almost five years. Airlines with under-funded pension plans include AMR Corp., Delta Air Lines, UAL Corp., Northwest Airlines and US Airways Group Inc. The bill would also allow the airlines to amortize their unfunded liabilities in equal installments over 20 years-and put off making the first payment until late 2007 or 2008.

The issue of duel ladder pension plans within a company has been in the news lately much to the chagrin of several airline companies including AMR Corp., and UAL Corp. as they seek to avoid going into bankruptcy. Other companies that have acknowledged having these special pension funds for their higher level executives include TXU Corp., Motorola Inc., Owens-Illinois Inc., Altria Group (formerly Philip Morris) and Abbott Labs.

A company that is making a contribution for the special executive pension plan is not breaking any laws. As we explain later in this article, federal rules require companies to make minimum contributions to a pension plan if the plan becomes overly underfunded. A company can spread the payments out over a period of time, but it does have to pay a higher premium to the Pension Benefit Guarantee Fund if it takes longer to bring the fund into balance.

The special pension fund for the higher level executives is sheltered from creditors if a company goes into bankruptcy. A company can make a payment into the special pension fund even though it does not have sufficient capital to make the payment for the regular pension fund. Motorola did in fact make a payment of $38 million into the special fund even though it did not add any money to decrease the underfunding in the regular pension plan.

In the past, executives did not have these special pension funds, but now with these special funds, the executives own their pension assets and the company's creditors can not get at this asset. A common way for a company to fund an executive pension fund is through the purchase of life insurance for the executive. This however is not the preferred way for it to be done, because the company owns the cash balance in the policy and this asset can be reached by the creditors.

Employers had argued that the anti-discrimination rules would have made it illegal for them to provide generous "transition relief" for older workers. The problem arises because when plans are converted from the traditional pension plan to the cash-balance plan, older workers lose out for several years. To soften the blow, companies wanted to offer their older workers higher pay credits-say 4% of salary per year worked-versus the 2% that younger workers would receive. Under strict interpretation of the new comparability rule, higher pay credits for older workers would run afoul of the law.

Rep. Bernie Sander (I., Vt.) has introduced a bill that would require companies that convert to cash balance plans to allow workers who are age 40 or have at least 10 years of service, to have the choice of receiving the benefit they would have accrued under the traditional pension plan at retirement. The proposal has 116 co-signers. Sen. Tom Harken (Dem.-Io.) introduced an identical bill in the Senate. The legislation would also forbid companies from low balling the value of pensions earned by older workers when they establish opening account balances.

Older workers at companies that now convert will lose out on the larger benefits that had been projected for them. The approval of the conversion to cash-balance plans had been held in abeyance since September 1999 by the Internal Revenue Service to study whether or not the changeover was discriminatory against older workers. Because of the loud outcry by workers at IBM in 1999, that company backed down over its conversion and allowed older workers to keep their old pension benefits.

According to a study done by the actuarial firm of Millman USA, 45 of the 100 companies involved in the study used an annual assumed rate of return of more than 9% for their pension funds for the year 2002. Eight of the companies examined used an assumed rate of return of 10% or more. In fact, almost all the pension funds examined lost money last year. The companies that used the highest rate of assumed return included Northwest Airline, General Motors and Honeywell International. Those using the lowest assumed rate of return included Berkshire Hathaway at 6.5% and Merrill Lynch at 6%.

The Millman survey showed that America's biggest companies assumed an average rate of return of 8.92% last year, and it looks like they will use an average rate of return of 8.5% for this year. A company's pension funding ratio indicates the extent to which current assets will cover projected future payments to retirees. General Motors, which has America's largest corporate pension fund will use 9% in 2003.

Companies in the S&P 500-stock index poured $46 billion into their pension plans in 2002, three times more than the year earlier, according to a study by Credit Suisse First Boston. The $46 billion represented about 6% of the cash flow for the companies involved in making the contributions. When companies are obligated to make contributions, they are allowed to do so incrementally, over three to five years. At the end of 2002 the study showed that the companies involved in the index faced a total shortfall of $216 billion, the first time that this has happened since 1993. Ford, GM and Verizon each saw declines of more than $10 billion in their funding plans.

A study done by two Federal Reserve Board staff members concluded that many company's stock were overvalued as a result of their reporting earnings from their pension plans instead of strictly from their core operating earnings. This overvaluation occurred because many investors use price/earnings ratios in evaluation how "cheap" a stock may be.

The study's authors, Julia Lynn Coronado and Steven A. Sharpe of the Fed's division of research and statistics, recommended that the current system of pension accounting "be re-examined and revised." The Federal Accounting Standards Board (FASB) requires that pension plan holdings be accounted for through a "smoothing" mechanism so as not to have a disproportionate affect on the quarterly earnings report from the company. The smoothing mechanism require companies to calculate their pension earnings in part, based on subjective estimates of future returns and discount rates, among other things. This allows more latitude in manipulating a company's earnings from quarter to quarter.

In concealing the true core earnings of a company, investors have another obstacle to overcome in determining how to accurately ascertain the value of a stock. By the end of 2001 the study concluded that the aggregate value of net pension assets among companies in the S&P 500 had plunged to a $2 billion deficit.

Last year GM spent about $1 billion to cover retirees and their families for health-care related costs. According to analysts, pension and health care costs add about $1,400 to the cost of every car that GM builds. GM's 460,000 retirees and surviving spouses outnumber active employees by about 3 to 1. When you take all these numbers together, it shows why the pension and health-care issue is one that will have to be dealt with by corporate America sooner, rather than later.

GM set up a pension plan for U.S. salaried workers in 1940 and one for hourly employees in 1950. GM salaried workers who started after 1993 are not eligible for company health insurance when they retire. Prescription drugs cost the company about $1,500 a year for each retiree. GM has instituted a widespread campaign among its employees and retirees to convince them that generic drugs can be just as good as brand name drugs as it tries to rein in its ever rising expenses for prescription drug coverage. A shift of one percentage point to generic-drug usage from brand-name usage results in a savings to GM of about $14 million. GM's health-care costs rose almost 6% in 2002.

Salaried workers at the company were promised "full basic health-care coverage for retiree and eligible dependents …for life at no cost to the retiree". That all changed in 1987 when GM instituted an annual deductible and co-payment for salaried retirees. In 1989, 114 salaried retirees sued GM, saying it had reneged on its health-care promises. Though the retirees won in the lower court, they lost the case on appeal in 1998.

Health benefits for future retirees are either being cut back or even eliminated according to a new survey from the Kaiser Family Foundation and the pension benefits consulting firm of Hewitt Associates. According to the survey about one in five large employers is very or somewhat likely to end health benefits for future retirees.

The survey was conducted among 435 companies that have more than 1,000 employees. In response to the question as to what changes they are likely to make over the next three years, 6% of the responding companies said they are very likely to terminate benefits for future retirees, while an additional 16% said they are somewhat likely to do so.

The Kaiser Family Foundation, a health care philanthropy in Menlo Park, Ca. reported that workers are already paying 27% more for health care coverage in 2002 than they were paying in 2001. Many large companies, such as Goodyear, Ford Motor and DaimlerChrysler have suspended matching contributions to 401(k) plans. According to statistics from the U.S. Department of Labor benefits costs account for about 27% of total labor costs.

Kaiser further reported that the average deductible for a preferred provider organization increased 37% to $276 this year. GM spent $4.2 billion last year to provide health care to its 1.2 million employees, retirees and their families. At Dupont retirees 65 and older will have a monthly increase from $37 to $87 for a family of two or more for their health care coverage In 2002, 61% of small businesses offered health care coverage to their workers, down from 67% in 2000, according to Kaiser. 

The Bethlehem Steel Corp. announced that it wanted to terminate all health and life insurance benefits for the vast majority of its retired workers and their dependents. The company had also announced days earlier that it had agreed to be bought by International Steel Group. Bethlehem had sent a letter to 95,000 people stating that "because we cannot pay the obligations" that they would seek approval of the bankruptcy court to terminate the plan. Since Bethlehem is in bankruptcy, the court must approve any plan to dissolve the health and life insurance benefits.

Many companies have chosen to voluntarily contribute early to their under funded pension plans last year, and will do so this year also, rather than wait till later years to come up with the money as required by the 1974 federal law known as the Employee Retirement Income Security Act. The reason for these "early payments" is because of a separate set of rules that governs pension accounting, known as the Financial Accounting Standards Board FAS 87. Under FAS 87 a company must record a charge against equity if its pension plan is short by a certain amount by yearend.

Rather than take a charge against equity many companies are opting to put the cash in now. Among the companies making these early funding are GM, Ford Motor, IBM and Honeywell International. IBM contributed about $2.1 billion in cash and about $1.9 billion in stock in December 2002 to restore its plan to a fully funded status. The reason this under funding of pension funds has taken place is because of the duel hit the plans have gotten from the bear market and the high assumption of returns that the funds had used in determining their rate of returns during the years 2000 through 2002.

Besides helping the balance sheet, the companies that are making these early payments save themselves from having to pay some added premiums to the Pension Benefit Guaranty Board (PBGB), the federal agency that insures pension plans. The more under funded that a pension plan may be, the more it has to pay in premiums to the PBGB. 

Many companies have been quoted in the news lately stating that their pension obligations are going to take a heavy toll on their earnings for this year. This is due to the combination of factors such as medical costs for present and retired employees having risen substantially in the last year, and the asset value of pension plans haven fallen substantially because of the drop in the stock market. With health care costs rising at the fastest rate since the early 1990's, many major companies including Ford and Sears have cut back on their retirees' medical benefits this year.

Pension planners had assumed that the assets in the pension plans would continue to grow at between an 8% and 10% on an annual basis, but instead have declined because of the bear market and low interest being earned by investments in the fixed income market. The same factors will be at work in 2003. As an example of this phenomenon, SBC Communications Inc., which is the nation's second largest local phone company to Verizon Communications Inc., said that those obligations will dent next year's earnings by $1 billion to $2 billion.

Judge David R. Herndon of the U.S. District Court of the Southern District of Illinois ordered Xerox Corp.'s pension plan to pay $284 million to former workers because of underpayment of retirement benefits. Judge Herndon had previously ruled in favor of the workers but he did not assess the damages at that point in the trial. Xerox said that the pension plan, which is a separate legal entity, would appeal the ruling on both the liability and damages issues.

The case involved the incorrect calculation of lump-sum payments due to the workers rather than what they should have been entitled to under federal pension benefits rules. In two similar cases, two different U.S. Circuit Courts of Appeals decided in favor of employees and against Georgia-Pacific Corp. and BankBoston., now part of FleetBoston.

The news lately has been filled with stories of the lavish perks and benefits that have been enjoyed by many of the top-level corporate executives. Watson Wyatt Worldwide, a human resource-consulting firm in Washington has released the results of their study of 56 retiree health plans offered by companies with at least 5,000 active employees. The results are not encouraging in regards to the health benefits for retirees. The study found that 17% of the companies have "virtually eliminated" their liabilities for such benefits by requiring retirees to pay the full premiums and 20% of the companies have eliminated such plans for new employees.

The federal Agency for Healthcare Research and Quality stated that the share of private-sector companies offering health insurance to retirees under age 65 dropped to 12% in 2000 from 21.6% in 1997. For retirees who were 65 and older this figure dropped to 10.7% from 19.5% during the same period.

The Watson survey also showed that the companies have cut their share of the premium cost for health benefits from 80% for current retirees to 60% for future retirees. The companies are also tying their share of premium payments to longer periods of employment. In addition to all of these items many companies are capping the amount that they will pay towards each retirees annual premium. The median cap is $4,450 for current retirees under the age of 65, but dropping to $3,900 for future retirees.

The Association of BellTel Retirees Inc., with about 86,000 members, has united with other corporate retirees to form the National Retiree Legislative Network to lobby for congressional action to stop large employees form canceling or reducing employees health benefits after they have retired

There is an article by Floyd Norris in the April 26, 2002 edition of the N.Y.Times entitled " Pension Folly: How Losses Become Profits." In the article he discusses the fact that many of the largest U.S. corporations booked earnings from their imputed pension fund earnings when in fact these pension funds actually had losses in 2001. The situation arose because many of the corporations and municipalities assumed that their pension funds would earn a certain percentage, when in fact they lost money in the stock market over the last 3 years.

According to his article: " A study by Milliman USA, a benefits consulting firm, found that in 2001 the reported results of 50 large corporations included $54.4 billion of profits from pension fund investments. In fact, the pension funds lost $35.8 billion from investments last year. The article failed to mention the fact as we discuss below, many executives of these companies earned bonuses based on the "earnings" of the company that included these "assumed gains".

As we point out below, these same executives are now changing the rules so as to exclude the pension losses from being included in determining the earnings of their companies. We do agree that the pension losses in the stock market should not be held against these executives but where were they when the system worked to their advantage?

The Wall St Journal had an article recently about how the steel industry is trying to take away some of the health benefits to retirees of company's in the industry that have fallen on hard times. The claim is being made that these "legacy claims" make our steel industry noncompetitive with some of the foreign steel companies. The recession in certain industries is causing many of the companies in these industries to look to reduce costs, and retiree benefits is one of the areas that many of these companies are looking to cut back on.

With the stock market showing losses over the last few years, McDermott International Inc. was the first company to change the way executive compensation would be determined in the future, with pension plan earnings no longer being involved in the calculation. Up until this time, as discussed below in the Credit Suisse First Boston Corp. report, many corporate executives whose pay was based on the company's earnings performance, benefited from the increased earnings that may were enhanced by the earnings from the pension account of the company.

A report issued by Credit Suisse First Boston Corp. analyst Jane Adams shows that nearly a third of big U.S. companies are getting part of their earnings from their employee's pension plans. According to the report, income from pension plans comprised an average of 12% of pretax operating income at the 158 companies in the S & P 500 stock-index that report pension income. The companies have been increasing their expected rates of return on the plans since 1999, when the stock market was flourishing and interest rates were higher than they are now.

In the case of McDermott, the Amalgamated Bank, one of the company's largest shareholders introduced a corporate resolution to have such income excluded from the computation of the executive's earnings. At first McDermott resisted the resolution, but now has gone along with it as shown in the corporate proxy recently mailed to shareholders. In the year 2000, the company had a pretax loss of $10 million that were offset by the $40 million gain recorded by the pension account. Now with the removal of this provision, these same executives will not be hurt by any losses or lower than expected returns, that the pension plan now will incur.

In writing about medical benefits plans in general we became very interested in the article that appeared in the Wall St. Journal entitled " As Firms Pare Pensions For Most, They Boost Those for Executives." It seems as if the gap continues to widen between the retirement income for the regular workers and the executives of the same company. This has resulted in retirement plans wherein the regular worker receives about 20 to 30% of his final salary versus the 50 to 100% of final salary that the executives receive. This is true because these special retirement plans are unfunded liabilities and thus are very difficult to trace on the balance sheets of the companies.

Frequently executives pay is linked to corporate earnings, which in turn benefit from cuts in the cost of pensions for regular workers and retirees. Executive pensions often provide annual cost-of-living increases while the same can not be said for the regular workers pension plans. FAS rules do not require companies to break out the liabilities of different pension plans.

In the early 1990s medical-cost inflation was running at a double digits level. Accountants were in a quandary in trying to estimate the future retiree medical liability for the corporations for whom they were doing the books. In trying to present a fair picture as to what the liability down the road would be the Financial Accounting Standards Board passed and put into effect Financial Accounting Standard 106, which took effect in 1993. The rule required companies to report their total estimated costs for their retiree-health coverage.

The rule however gave the corporations leeway in estimating what these costs would be. With health costs soaring, some of the companies used huge numbers in estimating what these future costs would come to. The investment community would not penalize them at that time because it was deemed as an extra-ordinary charge, and as such would not be used in determining the per share earnings of the company for the year in question.

Thus there was no deterrent at all for the company to pick a huge charge and at the same time use that charge to force their retirees to pay higher premiums for their health-care coverage. One company McDonnell Douglas went so far as to abolish their retiree-benefits plan altogether even though the plan was over-funded.

By ending the plan the company was able to generate $698 million in pretax income in 1992. In addition to the premium increases imposed on the retirees many of the benefits under the plans were cut back. In what may be the precursor of similar announcements from many other large companies in the future, Northrop Grumman Corp. announced a shortfall in their expected pension fund income, which will knocked $50 million from their earnings in 2001. In the last few years, Northrop has gotten about half of its income from pension fund investments.

Now we move on to the last 3 years in which the rate of inflation has been held well in check to about 3% per year. With the rate of retiree-health coverage inflation being cut sharply, and the retirees paying much higher premiums, the corporation's balance sheets therefore showed huge credits that the companies have been using to add to their income as they see fit.

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 November 21, 2008

http://www.therubins.com

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

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