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Wall Street Journal CareerJournal: The Wall Street Journal maintains
an archive of articles pertaining to retirement issues at http://www.careerjournal.com/myc/benefits/retirement/index.html.
Included in this archive are several articles by Ellen Schultz, who
has been instrumental in bringing pension and retiree issues to light.
- Fortune: Warren
Buffett on the Stock Market. In this article, Mr. Buffett compares
the pension fund future return assumptions used by IBM, GE, GM, and
Exxon in 1982 to those used in 2000. In 1982 when returns on long term
government bonds was 10.4%, IBM assumed a conservative 5.5% return on
its pension funds. In 2000 when long term bonds yielded only 5.5%, IBM
assumed a 10% return. Excerpts: "I'm a sporting type, and I would
love to make a large bet with the chief financial officer of any one
of those four companies, or with their actuaries or auditors, that over
the next 15 years they will not average the rates they've postulated."
... "Heroic assumptions do wonders, however, for the bottom line.
By embracing those expectation rates shown in the far right column,
these companies report much higher earnings--much higher--than if they
were using lower rates. And that's certainly not lost on the people
who set the rates. The actuaries who have roles in this game know nothing
special about future investment returns. What they do know, however,
is that their clients desire rates that are high. And a happy client
is a continuing client." If link is broken, view
Adobe Acrobat version [PDF--217 KB].
- Morningstar.com: Tearing
Through Padded Profits. Excerpt: "In fact, IBM has padded its
earnings by more than $400 million, or $0.50 a share, in each of the
past two years thanks to its overfunded pension plan. General Electric
added $1 billion to its profits last year, or $0.30 a share. Because
such additions can compose a goodly chunk of a company's annual profit,
they can help plump up a company's growth rate. GE increased its pretax
income by $2.3 billion in 1998; of that, almost $700 million came from
an increase in pension income. Hardly pocket change."
- Morningstar.com: The
Easiest Way in the World to Make Money. Excerpts: "If you're
an investor, the easiest way in the world to make money is by reading
Warren Buffett. But if you're a company, the easiest way to make money
is to simply assume that your pension plan will have high returns in
the future." ... "IBM, for example, reduced its costs by about
$1.2 billion in 2000 just because its pension plan was overfunded, and
a billion dollars isn't chump change even for a firm as gargantuan as
Big Blue. IBM's pretax income last year was about $11.5 billion, so
the pension plan contributed meaningfully to the company's 2000 results.
The real kicker is that about $200 million of the gain is attributable
simply to IBM's decision to raise its expected future return on plan
assets from 9.5% to 10%. That's it--an extra $200 million in profits
simply by assuming that pension assets will appreciate at 10% per year
in the future."
- Plan Sponsor (cover article): Mad
as Hell. Excerpt: "Janet Krueger still spends part of every
day thinking about how she can put right what she feels IBM set wrong
back in 1999. That is the year the company converted its defined benefit
plan to a cash balance formula. Krueger was part of a crusade that accomplished
what many would have viewed as an impossibility; she helped lead a movement
that convinced Big Blue to alter its pension strategy, broadening by
35,000 the number of individuals it would allow to opt out of the cash
balance plan and stick with the old-style annuity plan. Ultimately,
the traditional plan was offered to anyone who was older than 40 years
of age and had more than 10 years of service at the time the plan was
switched. However, three years after quitting a 23-year career as an
IBM software consultant, Krueger is not satisfied."
- Motley Fool: More
Earnings Shenanigans. Excerpts: "Earnings manipulations have
reached crisis proportions, says Whitney Tilson, who in this article
explains two of the leading tricks of the trade: big bath accounting
and the manipulation of earnings using gains in the value of pension
funds. Investors should pore over their companies' SEC filings to arm
themselves against potentially misleading information." ... "According
to Bear Sterns, 'aggregate 2000 operating income for the S&P 500
is approximately 3% lower when adjusted for retirement benefit income.'
But the impact on earnings is much larger for some companies. IBM (NYSE:
IBM), for example, would have had operating income in 2000 that was
nearly $2 billion (or 17%) lower than it reported had there been an
adjustment for service cost (the present value of the retirement benefits
earned by the employees working during the current year) and income
from its pension fund and other retirement benefits."
- Business Horizons. The
Effects of Adopting Cash-Balance Pension Plans. Excellent article.
Excerpt: "The negative effect on older workers has led to a number
of recent legal actions questioning whether these plan conversions are
discriminatory. In addition to Congress, four federal agencies--the
IRS, the EEOC, the Labor Department, and the GAO--are now investigating
the question of age discrimination in converting to the cash-balance
plans. Tax deductions may be disallowed if plans are found to discriminate."
Note that the 1999 IBM conversion is used as the main case study in
the article! If link is broken, view
Adobe Acrobat version [PDF--52 KB].
- Morningstar: Optimists
Make More Money. Excerpts: "By simply assuming a higher future
rate of return on their pension assets, companies can reduce their pension
costs, since they don't need to contribute as much to the pension fund.
Just as in the example above, this simple change in the expected rate
of return implicitly plumps up the company's bottom line by reducing
the amount of money it has to set aside to pay future retirees."
"IBM, for example, reduced its costs by about $1.2 billion in 2000
just because its pension plan was overfunded, and a billion dollars
isn't chump change even for a firm as gargantuan as Big Blue. IBM's
pretax income last year was about $11.5 billion, so the pension plan
contributed meaningfully to the company's 2000 results. The real kicker
is that about $200 million of the gain is attributable simply to IBM's
decision to raise its expected future return on plan assets from 9.5%
to 10%. That's it--an extra $200 million in profits simply by assuming
that pension assets will appreciate at 10% per year in the future."
"So what if these rosy predictions dont come true? Well,
if the returns on pension assets turn out to be appreciably worse than
the approximately 9% that the average large company is expecting, all
that juicy pension income will go away, and companies will have to start
paying into their pension plans as well. Moreover, the absurdity of
these high expected returns will become increasingly apparent, and when
companies revise them downward, the funding status of their pension
plans will look even worse."
"The bottom line is that if you own shares of a company with
a traditional pension plan, make sure you check to see how much of
its profits are coming from pension assets rather than its core operations--not
to mention the profits that flow simply by virtue of unfettered, unrealistic
optimism." If link is broken, view
Adobe Acrobat version [PDF71 KB].
- Wall Street Journal: Gains
in Pension Plans Give Boost To Many Firms' Quarterly Results. Excerpts:
"Despite the stock market's dreadful performance last year, the
nation's largest companies continued to receive large earnings boosts
from gains in their pension plans, according to a study released this
week." ... "Moreover, Mr. Ciesielski notes, pension assets
belong to pensioners, not stockholders, even though the earnings streams
produced by these assets show up in companies' income statements. The
pension gains, Mr. Ciesielski says, often 'make management look like
sluggers, when actually they're just regular hitters.'" If link
is broken, view Adobe Acrobat version [PDF-64
- Wall Street Journal: While
Executives See Their Pensions Grow, Regular Workers See Their Benefits
Shrink. Excerpts: "It's also part of a little-known sideshow
to the spectacle of surging executive compensation in recent years.
Word of CEOs rewarded with millions of dollars for enhancing profits
through layoffs has often provoked public indignation. But the ever-widening
gap in retirement income between regular workers and executives has
gone largely unnoticed by regulators, policy makers and investors. That's
true even though in the past decade, many big companies have been setting
up or improving special retirement packages for their highest-paid employees
while freezing or trimming pension, medical and other retirement benefits
for millions of lower- and middle-income workers."
"International Business Machines Corp. discloses that it has an
executive pension plan and reports the plan's liability separately --
but not the liability for a second, less-elite IBM executive pension
plan. A spokeswoman confirms this. In January 1995, IBM moved the bulk
of its work force into a 'pension-equity' plan, saving the company hundreds
of millions of dollars by reducing benefits, even as it set up its special
pension plan for executives. A spokeswoman says IBM found that its plan
for the regular work force was 'overly generous' compared to other companies'
plans. She says IBM also sweetened contributions to its 401(k) plan
after deciding that that program was less competitive." If link
is broken, view Adobe Acrobat
version [PDF-107 KB].
- Dow Jones News Service: Pension
Returns Loom Large In Many Companys' Earnings: Study Excerpt: As
Wall Street's scrutiny of pension plan income intensifies, a new study
shows that nearly a third of big U.S. companies are getting part of
their earnings from the plans - sometimes a significant part. The report,
issued last week by Credit Suisse First Boston Corp. accounting analyst
Jane Adams, also hints that companies can use pension accounting to
manage their earnings by changing assumptions to boost the amount of
pension income that can be factored into operating income. Thirty-four
companies, the analyst said, including giants such as International
Business Machines Corp. (IBM) and Verizon Communications (VZ), raised
their expected return rates and thus benefitted their earnings without
apparent justification based on past performance.
- Forbes: Recurring
Gains? Excerpts: "It's curious how, in the face of slumping
computer sales, International Business Machines isn't feeling the heat."
"For the first quarter of 2001 IBM netted $1.75 billion, or 98
cents a share, up 15% from the first quarter of 2000, on revenues that
were up only 9% to $21 billion. But investors should be wary of this
happy earnings picture, says Bradley Rexroad, an analyst at the Center
for Financial Research & Analysis, a Rockville, Md. research boutique.
A fair amount of the earnings gains in 2000 had nothing to do with the
strength in IBM's business operations." "The biggest item
on Rexroad's list of artificial gains is the accounting for retirement
benefits. IBM has been getting a nice kick to reported earnings from
the robust state of its pension plans. Pension-related effects boosted
the aftertax bottom line by $820 million last year, a 63% improvement
in this source of profits from the year before, Rexroad says."
"This shot in the arm comes in several forms. IBM has been shifting
from traditional defined benefits for retirees to "cash balance"
plans, which should cost less; the strength of the stock market (until
13 months ago) and the bond market has lowered the amount of additional
cash IBM had to pour into the pension fund; and the company last year
changed its assumption on the fund's future average returns from a somewhat
optimistic 9.5% to a more Pollyannaish 10%." If link is broken,
view Adobe Acrobat version
- Business Week: The
Numbers Game. Companies use every trick to pump earnings and fool investors.
The latest abuse: "Pro forma" reporting. Excerpts: Sure,
companies have always tried to present themselves in the best possible
light. But some of today's practices, though perfectly legal, sail close
to the wind: They seem designed to mislead unwary investors about the
real financial state of companies that use them. Fading dot-coms, new
tech giants, and venerable blue chips all hype their earnings. Cisco
Systems Inc. subtracts payroll taxes on employee stock options in its
earnings-per-share numbers. IBM lifts its earnings by assuming it would
pay less into its pension fund, and Motorola Inc. boosts sales by lending
huge sums to customers." ... "Company pension plans can become
a fruitful source of extra earnings. Companies can't generally take
money out of their pension funds, but by juggling several factors, including
the actuarial present value of benefits, interest rates, and expected
returns on assets, they can reduce or even eliminate what they have
to pay into their plans in any given year, according to Gabrielle Napolitano,
accounting maven at Goldman, Sachs & Co. For example, IBM picked
up $195 million--1.7% of pretax income--in 2000, when it raised the
expected rate of investment return from 9.5% to 10%..." If link
is broken, view Adobe Acrobat version
- Motley Fool: Fool
on the Hill: Where Has Corporate Integrity Gone? Excerpts: "A
smoothly functioning investment system depends on integrity: of financial
statements, of corporate leaders, of lawyers, bankers, and the media.
Recently, I've become increasingly distressed by the appalling breakdown
of integrity in this system." ... "At the Wesco annual meeting,
Charlie Munger railed against the way corporations use inflated return
assumptions for their pension funds to boost current reported earnings.
He specifically named IBM, which he said recently increased its pension
fund's assumed rate of return from an already high 9% to 10% annually.
If IBM and other companies were forced to lower this number to 6%, they
would have to take huge charges to earnings. IBM has used many tricks
like this to keep earnings per share steadily rising over the past few
years despite anemic revenue growth, one of the reasons I named the
company in my column, 'Stocks to Avoid.' (I discussed it further in
a subsequent column.) No wonder a friend of mine who manages a hedge
fund -- and who has shorted the stock in the past -- called IBM 'the
world's biggest accounting cheater.' That's a bit of hyperbole, perhaps,
but not much in my opinion." If link is broken, view
Adobe Acrobat version [PDF--57 KB].
- Barron's: Deconstructing
the Books at Big Blue [PDF--50 KB]. Excerpt:
"Relatively speaking, IBM is starting to look like a pillar of
strength. Big Blue has yet to lower its earnings expectations and has
been racking up consistent earnings. But don't let the happy news and
quarterly performance streak fool you, warns James Grant, founder of
Grant's Interest Rate Observer. In tumultuous times like these, people
want to believe that the mother of all tech companies is a safe haven.
But the reality is that the health of IBM's core hardware and software
businesses is difficult to detect because the company continues to play
the Street like a fiddle by fiddling with its income statements. 'IBM
is rightly known for the brilliance of its electronic engineering, and
no less impressive is its brilliance in financial engineering,' Grant
- Boston Globe: The
Pension Game. Excerpt: One of the biggest changes wrought by the
great bull market of the 1980s was that corporations learned to think
of pension funds as assets to be managed at least partly for the benefit
of shareholders rather than as trusts operated strictly for the benefit
of employees. ...With the boom of the 1990s, companies once again have
been learning to use the huge surpluses that have built up in their
pension funds, this time mainly for their own accounts. The new cash-balance
plans have proved to be a cornucopia of benefits - for corporations.
If link is broken, view
Acrobat version [PDF--49 KB].
- Savannah Morning News: Chief
addresses IBM's future. Company puts on a new face while sing the blues.
Excerpts: "But the happiness of his message to shareholders did
not carry through to the shareholder question time. Gerstner was dodging
and parrying more than blocking and tackling. Talk of a failed employee
bid to reinstall IBM's old pension plan dominated this part of the meeting.
Gerstner made an impassioned reply to the suggestion that part of IBM's
success, and Gerstner's executive compensation, were brought on by vapor
profits - ones that exist on paper only due to accounting rules, not
business success. 'There is something either very naive or very malicious
in this comment,' Gerstner said. 'If we wanted to manipulate compensation
at the price of employees, we could reduce salaries. We could cut variable
pay. When pension-related comments were made during the meeting, Gerstner's
image, projected on two huge screens, was replaced with a generic blue
field with white lettering saying, 'IBM stockholders meeting.'"
If link is broken, view Acrobat
version [PDF--161 KB].
- The Progressive Magazine: Cut
Loose. Companies Trick Retirees out of Health Benefits. Extract:
"'Lou Gerstner has only been at IBM for seven years,' says Conrad.
'He's affecting the lives of retirees who put thirty, forty years in.
They're the ones who built the company and created the wealth that Lou
Gerstner is now pillaging. When you have people who are ill, on fixed
income, the increased costs are going to create serious problems. That's
unconscionable. How can you do this to people? IBM has their own personal
piggy bank right now. And it's not their money. It's the employees'
and the retirees' money.'" If link is broken, view
Acrobat version [PDF--64 KB].
- Wall Street Journal: Securities
Regulators Back IBM In Shareholder Pension Dispute. Excerpt: "This
year a group of retirees and employees sponsored a resolution that would
have required that 'Future executive incentive compensation be determined
by profit from real company operations not including accounting rule
profit from pension fund surplus.' As at many other companies, IBM's
pension-fund surplus, fueled by the rising stock market, has boosted
Krueger comments. Excerpt: "Why did they fight so hard
to get the resolution omitted from a vote? Their action to keep
pension fund profit as a factor in executive incentive compensation--and
the $23 million the top five executives took out for themselves
in 1999, based in part on that accounting rule profit--belies their
- Binghamton (NY) Press and Sun-Bulletin: U.S.
Representative Hinchey still fighting for pension-reform legislation.
Extract: "In vigorously fighting a change in their pension distribution
formula, IBM Corp. workers may have unknowingly helped save the pension
benefits of thousands of other workers across the country." If
link is broken, view PDF version
- Poughkeepsie Journal: Feds
deny pension profit plan vote. Execs allegedly gain from benefit cuts.
Excerpts: "A group of IBM Corp. employee shareholders says executives
collect millions in extra pay because of a pension fund surplus management
fattened by cutting benefits." ... "The attempt sheds light
on the issue of how executives may realize personal financial benefits
from trimming pension benefits for employees. Hundreds of companies
have shifted to cash-balance pensions as IBM did in mid-1999, and some
employees say the changes shrank the value of their retirement assets."
If link is broken, view
Acrobat version [PDF-94 KB].
- NBC Nightly News: Corporations
change rules on retirees. Excerpt: "Many retirees have worked
all their lives, thinking their companies were going to pay for their
health care when they left. But many companies are now changing the
rules." Both the original video and an abbreviated transcript are
available at the MSNBC site. If link is broken, view
PDF version [122 KB]. Note: Ed and Dorothy
Hughes, featured in the report, still have much better coverage at their
age than future IBM retirees will have with the new Personal Health
IBM retiree comments.
- Wall Street Journal: Companies
quietly use mergers, spinoffs to cut worker benefits. Companies
still scrounge for ways to reduce pension benefits. By Ellen E. Schultz.
Extract: "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."
(If link doesn't work, view PDF version
- New York Times: Cuts
in Health Benefits Squeeze Retirees' Nest Eggs. (PDF,
24 KB) Extract: "Because of the economy and the labor
market, you can't squeeze worker health benefits," said Deborah
Steelman, a Washington lawyer who represents insurance companies and
drug makers, and a member of a bipartisan commission on Medicare reform.
"It's logical for employers to say, 'These people don't work for
me any more.' It's a place to cut."
Wall Street Journal: Retiree-Medical
Plans Are Transformed Into Source of Profits by Sears, Others.
"Sears Roebuck & Co. has figured out how to turn its medical-benefits
program for retirees into a source of corporate income." "The
seeds of the retiree-health windfall for many companies were planted
in the late 1980s, when the Financial Accounting Standards Board,
the accounting industry's rule-making body, began to develop standards
for reporting retiree-health obligations. Major companies, such as
General Electric Co. and International Business Machines Corp., played
an active role in the process, suggesting ideas to the accounting
board. Companies showed the board computer simulations of how various
proposals would affect corporate bottom lines."
- The London (England) Times: IBM
to face inquiry over pension fund. "IBM could face a multimillion-pound
bill to top up one of its pension funds if the Pensions Ombudsman upholds
complaints that the multinational has acted wrongly in cross-subsidising
contributions to its schemes."
Post: Pension Trend Painful to Some. "Fueled by recent General
Accounting Office reports and the ongoing complaints of a number of
IBM workers, the debate over cash-balance pension plans shows no sign
- CFO Magazine: FEATHERING
THE NEST EGG. Pension surpluses are a boon to corporate bottom lines.
But are efforts to expand them going too far? Excerpts: "Last year,
for example, when IBM converted to such a plan, one of the company's
engineers calculated that he would lose $212,000 when he retired in
10 years after 30 years of service. "The purpose of IBM's cash-balance
plan conversion was to slash obligations to employees, increase the
pension plan surplus, increase the company's operating income, and drive
up its stock prices," says James Marc Leas, an advisory engineer
and patent lawyer at IBM's Burlington, Vermont, semiconductor fabrication
plant." "...largely in response to the protests of employees
at IBM and other companies, a Senate panel, the Internal Revenue Service,
the Equal Employment Opportunity Commission, the Department of Labor,
and the Pension Benefit Guaranty Corp. are all in the process of reviewing
cash-balance plan conversions to determine if, among other things, they
violate U.S. age-discrimination laws."
- Wall Street Journal: Retirement-Savings
Bill Draws Fire for Proposals. (Requires Adobe Acrobat Reader).
(Editor: excellent article, don't miss!) "Some unions, including
the Communication Workers of America and the AFL-CIO, are objecting
to certain cash-balance pension measures that appeared in the Senate
version several weeks ago. Those provisions would help employers fight
legal challenges to their cash-balance plans and continue the practice
of "wearing away" the early-retirement subsidies of older
workers, a practice to which the Treasury objects."
- Washington Times: Pension
Protection Astray? "Although the Senate version of the proposed
legislation includes some potentially helpful provisions, the vast majority
of the benefits go almost entirely to upper-income taxpayers, a relatively
small group that is already well prepared for retirement."
- San Francisco Bay-Guardian Editorial by Ralph Nader: Pension
Takeaway: Stop Corporate Schemes To Undermine Pension Benefits.
"At a time when CEOs are paying themselves exorbitant salaries,
stock options, and benefit packages, corporations are slashing the pension
benefits of workers who have helped build their companies. The most
heinous of the pension takeaway schemes include switching to cash balance
plans (which deprive workers of expected benefit increases from their
final years of company employment), changing pension formulas with obscure
"modifications" that are really cuts, and "wearaway," which can force
employees to work many additional years to increase pension benefits
beyond previously established levels..."
- Wall Street Journal: Fidelity Urges Its
Investors To Lobby Retirement Plan. "Fidelity Investments is
waging an unusual Internet campaign to turn its 16 million customers
into amateur Washington lobbyists for a retirement-savings package pending
in Congress. But there's something Fidelity isn't telling its customers:
Some of them could actually be hurt by obscure provisions recently added
to the Senate version of the package." "If adopted by Congress,
the retirement-savings package could be a windfall for the mutual-fund
industry, which earns lucrative fees for managing 401(k) plans and IRAs.
Of $1.7 trillion in U.S. 401(k) assets, 45% were invested in mutual
funds at the end of 1999, according to the Investment Company Institute,
the mutual-fund trade organization. Almost half of the $2.5 trillion
in IRA assets is socked away in mutual funds. And Boston-based Fidelity,
with about $1 trillion in assets under management, is the number one
player in the mutual-fund and 401(k) markets."
- CNN Financial Network: CEO
salary gap widens. Executive pay surged 535% in 1990s, while average
worker pay rose 32%.
- Fortune Magazine: Hocus-Pocus:
How IBM Grew 27% a Year. Do you want to believe in the IBM miracle?
Then don't look too closely at the numbers
Street Journal article comparing how two companies converted to
cash-balance pensions. One company did it right, the other company (guess
who!) is repeatedly used as an example of a company that did it wrong.
Excerpt: "Legislation introduced by Rep. Bernie Sanders, a Vermont
independent, would require employers who are converting to a cash-balance
or pension-equity plan to offer employees a choice of staying in the
old plan." "Employers generally complain that such choice
is too costly. Mr. Sanders finds this amusing in some cases. 'If converting
to a new pension program doesn't save a company any money, as some companies
say, it should not be too expensive for companies to offer all of their
employees the choice to remain in their original pension plan,' he says."
- New York Times: What's
Hiding in Big Blue's Small Print Excerpts: "...the combination
of a roaring stock market and lower costs associated with IBM's controversial
switch to a new sort of pension plan generated $799 million in 1999.
Accounting rules let such gains go into a company's income statement,
although the company cannot spend the money for anything but pensions...
"Because these gains are typically buried in financial statements,
shareholders may not understand how a company's earnings are augmented
by pension gains...To be sure, IBM is just one of many companies that
continues to bury details about its pension plans' gains. But Big
Blue could be clearer. ...'IBM's annual report is one of the most
complicated,' said Brad Perry, former chairman and now consultant
at David L. Babson & Company, an investment advisory firm in Cambridge,
Mass. 'Obfuscation is the name of the game, not just for IBM but for
a lot of companies.'
"Another area of IBM's financial report that is difficult to
fathom concerns stock buybacks, which have totaled $14.2 billion in
the past two years. By reducing the number of shares outstanding,
the buybacks have helped IBM's per-share earnings grow at a respectable
10.5 percent -- masking the company's slow growth in revenue and income...
"But the purchases come at a cost, Brad Perry added: IBM's ratio
of debt to total capital is 54 percent, up from 31 percent four years
ago. 'It's one thing to buy back shares if you have excess cash flow,'
Mr. Perry said, 'but when you're loading up the balance sheet with
debt to jazz up your earnings, that's more suspect. And it certainly
is a game that has an end.'"