Business Is Shaking Pension-Fund Piggy Bank : Use of Excess Cash Is Windfall for Firms, Source of Concern for Employees

During his 43 working years at Getty Oil, William J. Higgins helped design the company’s pension fund, watched it change over the decades and counseled hundreds of colleagues on how to prepare for the financial uncertainties of retirement.

But now in his own retirement, Higgins worries about his financial future--and the prospects of those he counseled.

The reason is that Texaco officials, who took over Getty, seek to withdraw $250 million from the $689-million Getty pension fund. They want to use the money elsewhere in the combined company, and say they will buy annuities from an insurance firm to provide for the retirement benefits. Many former workers worry because the move could mean an end to inflation adjustments in their benefits and because the annuities are not federally insured.

“There’s great concern among the retirees,� said Higgins, 66, who retired at the end of 1983. Texaco’s managers “owe no allegiance to the Getty people. The retirees never even worked for Texaco.�

What Texaco managers have done is ask the government’s permission to execute an increasingly popular corporate maneuver: siphoning “excess� cash out of a pension fund--money considered above what is necessary to pay its legal obligations--and apply the windfall to other expenses.

In the last five years, nearly 400 companies employing more than 450,000 workers have scooped $3.5 billion out of their pension funds. The Labor Department currently is considering applications by 223 companies with 200,000 employees to remove $2 billion more.

But critics, such as Rep. Edward Roybal (D-Los Angeles), warn that the financial security of individuals in pension programs may be jeopardized when companies use retirement funds as corporate piggy banks. The House Aging Committee chairman and others cite these dangers:

- Retirees’ ability to keep up with inflation may be weakened. Getty and other companies typically have provided inflation increases to their retirees as a discretionary benefit, a good will gesture that is not required by law. But when funds are cut to the bare-bones minimum to pay current obligations, nothing may be left for future cost-of-living hikes.

- The ultimate size of retirement benefits may be uncertain. After withdrawing the extra money, companies often modify their pension programs. Instead of spelling out the precise benefit to be counted on, companies may promise only to contribute a set amount toward the pension. Benefits will then be determined by the vagaries of future interest rates and other market factors. “If you retire six months ahead of me, and then the (stock) market goes to hell, I might get a much smaller pension than you,� said David M. Walker, acting executive director of the federal Pension Benefit Guaranty Corp., which insures certain kinds of pension plans.

- Some workers may lose the more generous benefits that go with seniority. This can happen if a company starts up a new program without offering credit for past service. A Labor Department study found that a worker could give up 45% of his potential retirement benefit this way, although officials say it is not a common problem.

It’s easy to see why employers want to withdraw the excess money. Pension funds, generally financed by employers’ tax-free contributions, are weighty investment portfolios, typically a mix of stocks, bonds and other assets that rise and fall in value. The value of many, enriched by healthy stock market profits and interest earnings on bonds and bank deposits, have risen markedly in recent years and are endowed with far more money than would be needed to pay off their pension obligations if the plans were terminated today.

Companies can use the windfall to buy equipment, pay debts, or finance other corporate needs. More and more, companies look at the funds as factors to be considered in takeover strategies and defenses.

A Key Consideration

Norman Weinger, an analyst with Oppenheimer & Co., told a group of investors and securities experts in Los Angeles last week that he considers a company’s pension fund a key asset in determining the firm’s desirability as a takeover target.

Weinger used United Airlines to illustrate the point, pegging its market value at about $1.5 billion and estimating that its pension fund harbors an extra $1 billion. With that money alone, a corporate raider could go a long way toward hauling off the airline.

“Where you have an overfunded fund, you have a bargain in the making,� he said, warning: “If the pension fund is underfunded, don’t touch it.�

Actually, the current activity was spawned less by takeover strategy than by the tough economic times of 1981 and 1982, when companies searched hard for untapped sources of cash, said Henry Bright of Wyatt Co., an employee benefit consulting firm. Pension funds began swelling as the stock market recovered.

“Assets increased dramatically in relation to the liability of plans,� noted Bob Davis of Wyatt. Managements suddenly discovered a bundle of cash on the veritable doorstep of corporate headquarters. And outsiders began paying attention, too.

Philip Sempier, vice president and treasurer of Chubb Corp., a Warren, N.J., holding company, said that takeover concerns and a desire for cash figured in Chubb’s recent move to recapture an $80-million surplus from its retirement program.

“We felt that the timing was right,� Sempier said. “Here we were sitting on a portfolio that at the time was worth $160 million.�

Can Modify Benefits

Fred Sher, a partner at the Hewitt Associates consulting firm, said that if companies follow proper procedures, retirement benefits need not be jeopardized. He added that those benefits already earned are protected by law, but companies are free to modify benefits that somebody might be expecting down the road.

Neither does the law protect the cost-of-living supplements enjoyed in the past by retirees at Getty and other companies. Asked about the Getty retirees’ concern, a Texaco official said in a statement that the policy on inflation supplements would be reviewed periodically, noting “we aren’t in a position at this time to make any definite commitments.�

In addition, the federal government no longer insures a retiree’s benefits when a company, such as Getty, arranges for them to be financed through an annuity from an insurance company. The annuities would provide retirees with regular payments based upon the company’s cash investment. While some workers are concerned that insurance companies offering the annuities could fail, thus jeopardizing benefits, federal officials must approve the insurance company and the financial arrangement as a way to protect the retirees.

“We don’t deal with fly-by-night outfits,� said a spokesman for the Pension Benefit Guaranty Corp. (PBGC), insisting that the government sets tough standards on the annuities.

A different issue is raised when companies set up new pension plans and only promise how much they will contribute, not how much the retiree will receive.

Defined Contribution

In a traditional pension program, known as a defined benefits plan, employers predetermine what will be paid upon retirement, based upon factors such as salaries and years of service. But many employers are turning to defined contribution plans under which employers promise only to contribute a specified amount to a pension plan; benefits would depend on the pension funds’ market value.

Under the defined contribution plan, two workers with the same length of service could get dramatically different pension benefits. Even more worrisome, benefits in these plans lack the protection of government insurance in case the company goes out of business or suffers financial disaster and cannot make pension contributions.

Royal S. Dellenger, the PBGC’s acting deputy director for insurance operations, warned that if the retirement year turns out to be a time of market disaster, “you could get a hell of a lot less.�

Occidental Petroleum terminated three of its own pension plans along with its Cities Service subsidiary’s retirement program in 1983, capturing $368 million. Occidental replaced the old, clearly defined benefits with new ones that can go up or down depending on the market value of investments. The new plan is no longer insured by the government.

Each pension case seems to have its peculiarities. After Occidental Petroleum took over Cities Service in December, 1982, for example, it took $237 million out of the Cities Service pension fund, as well as surpluses from other pension funds, and allowed workers to choose between getting an annuity equivalent to their earned benefits or to participate in a new, defined contribution plan in which a 12% return on the investment was guaranteed for 10 years.

“Now, if that’s a risk it’s a nice risk to be in,� said an Occidental spokesman who requested anonymity, contending that the risk of defined contribution plans is often exaggerated.

Not All Delighted

At the same time, not all employees were delighted with the change. Those aged about 55 to 57 potentially would have lost up to 15% of their pension benefits if they chose early retirement under the new plan. But Occidental notes that such employees would have benefitted under the arrangement if they had put off retirement for a few years.

Workers and retirees ask why they too should not share in the bounty of an overflowing pension fund, contending that the fund expanded with their own deferred wages. In some cases, workers’ direct contributions have enriched the funds.

Union leaders note that workers have accepted lower pay at times in return for company donations to the funds. “You are really taking wages and shortchanging those workers,� maintains Lawrence T. Smedley, an official with the AFL-CIO.

Higgins said that Getty workers gave $20 million to the company’s retirement fund between 1950 and 1970, when they still made direct contributions: “By even the most moderate of assumptions, that $20 million has grown to $60 million,� he said. “Well, of the $700 million in the Getty fund, does that mean that $60 million belongs to the people who contributed?�

Noting that the Celanese Corp., a New York chemical company, has moved to take $300 million from its pension fund, a disgruntled retiree wrote the Pension Rights Center in Washington: “If the investments have been so successful that the fund has a 40% surplus, should not I and other retirees share in the bonanza?�

Will Grant Increases

In response to such concerns, Celanese has pledged to continue its policy of granting periodic pension increases to its retirees, and the company also says that its plan will provide an improvement in benefits for current employees.

But employers are under no requirement to parcel out the wealth of a successful pension investment, just as they aren’t allowed to cut back on retirement checks when the fund’s return fails to cover the payments, assuming it is a defined benefits plan.

Walker of the PBGC voiced the argument companies use to justify their profit-taking from the retirement funds: “If the employer bears the risk, he should be able to reap the benefits.�

It’s uncertain how many workers or retirees actually have paid--or will pay--a price for all this interest in the sources of their retirement checks. Alan Lebowitz, acting director of the Labor Department’s office of pension and welfare benefit programs, acknowledged that the practice “certainly does hurt some workers in some companies,� but added that Labor Department officials don’t know how many people have been hurt financially.

“All I can observe is that the law is clear and unambiguous on the right to terminate a plan,� he said. “Questions of morality are for someone else, a higher authority as they say.�

On the political plane, Roybal and Sen. Howard M. Metzenbaum (D-Ohio), have proposed a moratorium on all terminations of pension funds, pending a congressional review of the consequences of such activity. But the legislation is stalled, and the trend continues.

“Legally, what Texaco is doing is proper,� said Higgins, the Getty retiree, in an observation that applies to other companies as well. “The fact is that if you or I were running a company and we needed $250 million and it was in the pension fund it would be hard not to grab it. But it creates a lot of consternation among employees and retirees.�

HOW FIRMS HAVE TAPPED PENSION FUNDS Figures show the largest sums removed from pension funds since 1980.

Amount removed Number of Company (in millions) enrollees Occidental Corp. (4 plans) $368 22,730 Celanese Corp. 325 7,292 Great Atlantic & Pacific Tea 272 27,639 Reynolds Metals Co. 126 12,048 Amax Inc. 124 1,291 EES Insurance of Wausau 112 9,493 Stroh Brewery Co. 97 3,876 Armour and Co. 95 1,054 St. Regis Corp. 88 9,964 Diamond International Corp. 65 5,422 AM International Inc. 63 12,499 M. W. Kellogg Co. 58 9,746 GAF Corp. 56 8,325 Humana Inc. 52 27,002

Source: Pension Benefit Guaranty Corp.