Companies Quietly Use Mergers and Spinoffs To Cut Worker Benefits

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Companies Quietly Use Mergers and Spinoffs To Cut Worker Benefits

(12/27/00 7:10:29 AM PT) By Ellen E. Schultz, Staff Reporter of The Wall Street Journal

General Electric Co. got more out of the sale of its aerospace unit seven years ago than the publicized purchase price of $3 billion. The company also extricated itself from certain pension benefits it owed to transferred workers such as Vernon Wagner, a veteran missile-plant employee in Utica, N.Y.

Today, GE is thriving and has a hugely overfunded pension plan. Mr. Wagner and his wife, Pauline, lost $23,000 in severance money and thousands more in pension payments. Now, they skip seeing the dentist and are just scraping by.

GE is just one of many major companies that have cut employee benefits in connection with mergers and other deals. Mergers often lead to more visible forms of pain for employees, such as layoffs and plant closings. But when it comes to benefit cuts, workers and retirees often don't even realize they are happening because the language of pension and medical plans can be arcane and some companies tend to shroud benefit reductions in euphemism.

Among the other large corporations that in recent years have trimmed benefits in connection with mergers, sales of units or other deals are: Monsanto Co., Merck & Co., SmithKline Beecham PLC and Chiquita Brands International Inc.

Companies use a range of methods for shrinking benefits. Some try to make units more attractive for sale by cutting employee medical-coverage liability. Others convert a pension plan to one that's less generous. Yet other corporations retain the pension plan for a unit being sold -- which allows them to continue to invest the pension assets -- but at the same time freeze the pension rights of the transferred employees.

Some corporate deals include the transfer of a sizable pension-plan surplus, an amount over and above what is needed to fulfill obligations to retirees. You might assume that where there are surpluses, current and retired workers could expect their benefits to remain secure.

But in an ironic twist, companies involved in such pension-surplus transactions sometimes still scrounge for ways to reduce pension benefits. The reason for this is that under the tutelage of outside lawyers and consultants, companies have come to view pension surpluses as assets that, in effect, can be bought and sold at the time of a merger, sale or acquisition. Companies' ability to cash in their surpluses -- a maneuver that Congress sought to deter in the past -- provides a powerful incentive to pump up surplus levels by slashing benefits.

Consider the benefit disputes related to General Electric's 1993 sale of its aerospace unit -- clashes that still linger in federal courts in New York and Washington, D.C.

GE sold the unit to fellow defense contractor Martin Marietta Corp. As part of the deal, GE transferred $1.2 billion in pension assets to Martin Marietta to cover the liabilities for 30,000 employees who were transferred. The companies didn't specify what portion of the pension assets constituted a surplus. But in subsequent litigation against GE concerning the pension plan, the federal government estimated the overfunded portion at $531 million.

The existence of such a large surplus didn't mean, however, that transplanted workers such as Mr. Wagner saw their pension rights bolstered. To the contrary, when GE transferred the pension plan, it sharply curtailed workers' eligibility for an early-retirement subsidy that can be worth as much as hundreds of dollars a month to employees who retire in their 50s. Actuaries estimate that truncating this kind of benefit typically saves an employer 20% of its overall pension expenditures for a given pool of workers -- perhaps tens of millions of dollars, in GE's case.

Normally, early-retirement subsidies are protected by federal pension law. But the law allows companies to strip away such benefits from workers transferred in connection with a sale. Rather than remaining eligible for the benefit, the former GE workers retained eligibility for only about a year after the unit sale, and then the subsidy was ended.

The GE transaction cost Mr. Wagner and other transplanted workers in another way: They lost their rights to severance pay built up over the years of their GE service.

Before being transferred to Martin Marietta, Mr. Wagner, who is 58 years old, worked for GE for 22 years, most recently as a quality inspector at a radar and missile plant in Utica. Two years after that move, in 1995, Martin Marietta merged with Lockheed Corp. The new Lockheed Martin Corp. then shut Mr. Wagner's plant, costing him his $18 hourly paycheck. His now-lost GE severance, based on his long service, would have paid him a lump sum of $32,000. Lockheed Martin, by contrast, gave him only $8,900.

In addition, because he was no longer in the GE pension plan, he lost his ability to draw his pension immediately. Lockheed Martin's less-generous rules required him to wait 21 months, until he turned 55. At that time, he began collecting $1,090 a month.

For months after the 1996 plant closure, Mr. Wagner says, he looked for new work in the depressed Utica area, sending out 130 resumes. He got no offers. Mr. Wagner supports his disabled wife, Pauline, who has diabetes and can't hold a job. When his severance pay and government unemployment compensation ran out six months later, he began dipping into his only other significant asset: $53,000 from his GE 401(k) plan, which he had rolled into an Individual Retirement Account. Because he hadn't yet turned 591/2, he had to pay 10% federal tax penalties on the IRA withdrawals. By August 1997, when he finally found a new job, the account had shrunk to $11,000.

He went to work for a local bank, serving home-foreclosure notices, a task that became even more grim when he was told to repossess his own son's home. Mr. Wagner says he passed that assignment to a colleague. Last year, he quit the bank and took a nursing-home maintenance job that now pays $7.87 an hour, with no benefits.

The Wagners are struggling to make ends meet. They have health coverage from Martin Marietta that pays for some of Mrs. Wagner's diabetes medication, but they don't have any dental benefits. Besides not seeing a dentist for years, Mrs. Wagner has cut back on her hobby of crocheting to save money on yarn. To help them reduce their grocery shopping, their 33-year-old son, Paul, supplements their larder by hunting deer and turkey.

Thanks in part to its nimble shedding of employee-benefit liabilities and retention of pension-surplus assets, GE, based in Fairfield, Conn., last year reported no net expenses for pension, medical and life insurance for its 193,000 retirees and beneficiaries. Even before its recently announced plan to acquire Honeywell International Inc., which had its own overfunded pension plan, GE had a $25 billion surplus in its plan in 1999. That surplus helped the pension plan contribute $1.3 billion to operating income, which accounted for 9% of that income. (Employers by law have to keep surpluses in pension plans. But the ability to enjoy these kinds of balance-sheet boosts is one reason companies try to pump up surpluses and trim benefits.)

Mr. Wagner says he understands that companies aim to make profits, but he perceives "a loophole in the system, where they can merge together and benefit, but ruin people's lives."

He wasn't the only ex-GE employee frustrated by the Martin Marietta deal. A group of former GE workers, claiming to represent thousands of others like them, filed a class-action suit against the company in federal court in New Haven, Conn., in 1993. The suit alleged that as part of the Martin Marietta deal, GE had improperly sold a portion of its pension-plan surplus, killed the early-retirement benefit, and failed to make required disclosures about changes in benefits before the sale.

In a series of rulings issued from 1996 through this March, U.S. District Judge Janet Bond Arterton dismissed the entire suit. She concluded that GE's only legal obligation was to transfer adequate pension assets to cover the former workers. Since it had, the employees lacked any legal claim related to the surplus or the early-retirement benefit, the judge said. The employees have appealed, and the case is pending before the federal appeals court in New York.

A GE spokesman says in an interview that the company preserved all benefits to which employees were entitled. "We do work on transition arrangements [for employees] to provide continuity for a period of time," the spokesman adds, but he declines to comment further.

GE's surplus transfer provoked a separate legal attack by the U.S. government. In an administrative complaint last year, the Defense Department and various other federal agencies argued that since they had funded GE's pension plan in connection with government contracts, any surplus should go to the government. The U.S. valued the surplus at $531 million and demanded $419 million in interest, as well.

GE rebuffed the government and sued it in the U.S. Court of Federal Claims in Washington. GE alleged that the government owed the company hundreds of millions of dollars for retirement benefits for aerospace workers that weren't transferred to Martin Marietta. The dispute is pending.

Until the late 1980s, companies that wanted to grab surplus pension assets usually terminated their pension plans to siphon them off. To stop such terminations, Congress approved an excise tax on surplus assets that became effective in 1990 and made these maneuvers much less lucrative. Since then, however, corporate attorneys and benefits consultants have invented ways for companies to get around the tax and "unlock" pension-surplus value, usually by means of restructurings. Copyright (c) 2000 Dow Jones and Company, Inc.

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-- Martin Thompson (mthom1927@aol.com), December 27, 2000


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