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You are here: Home / Burning Rome Then Fiddling

Burning Rome Then Fiddling

by John Cole|  June 7, 20055:45 am| 12 Comments

This post is in: General Stupidity

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This just makes you sick to the stomache:

Loopholes in the federal pension law allowed United Airlines to treat its pension fund as solid for years, when in fact it was dangerously weakening, according to a new analysis by the agency that guarantees pensions. That analysis is scheduled to be presented at a Senate Finance Committee hearing today.

A second report, by the comptroller general, found that most companies that operate pension funds are using the same loopholes. Those loopholes give companies ways – all perfectly legal – to make their pension plans look healthier than they really are, reducing the amount of money the companies must contribute.

United’s pension fund failure is now the biggest since the government began guaranteeing pensions 30 years ago. Most companies are able to keep their pension plans going, despite the chronic, hidden weakness, because they are generating enough cash to meet their obligations to current retirees. Only when a company files for bankruptcy, as United did in December 2002, and terminates its pension plan, as United has, does the government step in and make the plan’s true economic condition apparent.

“We saw similar practices and events at Enron, but unfortunately, this time it’s perfectly legal,” said Senator Charles E. Grassley, the Iowa Republican who is chairman of the finance committee. He said he had scheduled today’s hearing because he wanted to find ways to keep pension disasters like the $10 billion failure at United from happening at other companies.

“The rules are full of serious holes that need to be fixed as soon as possible,” Senator Grassley said. “No one should make the mistake that this is an airline-only problem. The reality is that companies everywhere have used the same arcane pension-funding rules” to shrink their contributions.

Many analysts believe that the federal Pension Benefit Guaranty Corporation will one day require a bailout because it has been forced to pick up a number of large failed private pension plans. The more big defaults there are in the meantime, the more the eventual bailout will cost.

They knew it was happening and… did nothing. Corporate and Congressional responsibility.

And any time you compare anything to Enron, it isn’t good. Read the whole thing.

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12Comments

  1. 1.

    Jeff Guinn

    June 7, 2005 at 6:37 am

    In the late 90’s when the flying was smooth, and my airline was $1.3B per year in the black, management concluded the stock market was due for a correction.

    Therefore, management decided to accelerate contributions to the pension plan, just in case things should go south.

    The IRS stopped the plan cold.

    Now that things have gone south in a big way, the government wants payments that will run the companies into the ground.

    I know where the idiocy lies here, and sure isn’t with my airine’s management.

  2. 2.

    Ben Lange

    June 7, 2005 at 10:24 am

    Airline employees’ unions demanded more and more goodies from their employers, the costs of which were passed onto the customers, who simply stopped flying.

    Now there’s no money to pay the goodies, and the employees are shocked! “What do you mean, there’s no free lunch? We demand our free lunch!

    I don’t feel too much sympathy for people who pay the appropriate price for their greed.

  3. 3.

    Pat

    June 7, 2005 at 10:32 am

    Ask the Delta employees about greed. Their management set aside a lovely financial nest egg for themselves while demanding that their employees (including $20k per year flight attendants) took another pay cut.

    Don’t be so quick to blame the rank and file for greed. Also don’t assume that all airline pilots make six figures. There are more than a few air transport pilots flying $12 million airplanes with a couple dozen people on board who qualify for food stamps. Think about that the next time you get on a commercial airplane.

  4. 4.

    Mr Furious

    June 7, 2005 at 11:58 am

    Yeah, those greedy bastards, expecting to collect the pensions they paid into for years…

  5. 5.

    J. Michael Neal

    June 7, 2005 at 12:04 pm

    Jeff Guinn has it half right, but the half he gets wrong is critical. Yes, the government (not the IRS, though) required companies to keep putting money into their pension plans during the 1990s, though much less than you would think, givne the returns that the pension funds were getting. However, they were under no obligation to buy expensive equities.

    The reason they did so lies in some of the details in pension fund accounting. In short, the formulas for determining how much the fund was worth allowed them to assume a significantly higher return on equities than on fixed income. Hence, every time they needed to goose the earnings report, they simply shifted money from fixed income to equities; since the fund is an asset, and this move allowed them to inflate its value, earnings magically appeared. They stayed on this treadmill for a long time.

    Of course, it also meant that the companies were able to claim higher earnings at exactly the same time that equities were the most overvalued. Mostly by coincidence, companies started running up against the limit of the amount of pension fund assets that they were allowed to hold in equities right about the same time that buying them was the most attractive. So, they ended up anti-scalping themselves horribly.

    (As an aside, other details in the accounting rules have led them to start switching money from equities to hedge funds right about the time the the latter were at their peak.)

    A huge percentage of profits for a lot of companies, and hence the basis for executive bonuses, were the result of these tricks that allowed them to put less money into the pension funds at the same time they increased their risk profile. (GM was also a one of the firms that used this windfall to payout very large dividends) The result was absolutely predictable. Yes, Ben, this was a product of greed, but not really on the part of the unionized employees. One can argue that there were ways in which union contracts were too generous for the airlines’ long term health; I’m not saying that I’d agree with you, but it could be argued. Pension underfunding is not one of those ways, though.

  6. 6.

    Rick Moran

    June 7, 2005 at 12:39 pm

    The sad fact is that ERISA (Employee Retirement Income Security Act) is shot full of loopholes and every attempt at reform has been met with a wall of opposition from the Chamber of Commerce and the National Association of Manufacturers.

    What’s needed is one of those blue ribbon commissions with both business and labor represented equally. Maybe their recommendations would carry some weight…then again, the sun may rise in the west tomorrow.

  7. 7.

    Kimmitt

    June 7, 2005 at 1:02 pm

    My father-in-law insists that United put the absolute maximum allowed by law into the pension plans.

  8. 8.

    Dodd

    June 7, 2005 at 1:16 pm

    Most companies are able to keep their pension plans going, despite the chronic, hidden weakness, because they are generating enough cash to meet their obligations to current retirees.

    Sounds exactly like a Democrat talking about Social Security.

  9. 9.

    Kimmitt

    June 7, 2005 at 2:32 pm

    Sounds exactly like a Democrat talking about Social Security.

    …or a life insurance company executive. What does this tell you?

  10. 10.

    Rick

    June 7, 2005 at 3:29 pm

    That there’s no reason to revere one and not the other.

    Cordially…

  11. 11.

    Kimmitt

    June 8, 2005 at 1:50 am

    Meh, if you lot were engaged in a full-bore attack on the life insurance policies of every American alive, we’d be pretty upset about that too.

  12. 12.

    Eric Pobirs

    June 8, 2005 at 2:18 pm

    I’ve never understood the idea of entrusting the management of one’s retirement funds to people who have a vested interest in your not receiving the money.

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