TIME: Almanac 1993/TIME Almanac 1993.iso/time/060391/0603200.000

Text File | 1992-08-28 | 10.9 KB | 218 lines

                                                                                BUSINESS, Page 42

INVESTMENTS

Is Your Pension Safe?


Most are sound. But that is no comfort to retirees who are finding
that after a lifetime of hard work, the check is not in the mail.

By JANICE CASTRO -- Reported by Gisela Bolte/Washington and Dan
Cray/Los Angeles


    After 33 years with Blue Cross of California, Ray Finan
thought his income was secure when he and his wife Lillian, a
self-employed medical malpractice attorney, retired in 1984. He
never knew that their financial security evaporated when, two
years later, Blue Cross terminated its pension plan and instead
bought annuities from Executive Life Insurance Co. The checks
kept coming all the same. But by the time Ray Finan died in
1988, Executive Life was careering headlong toward financial
disaster.

    This April, California insurance commissioner John
Garamendi seized the $10.1 billion insurer as it teetered on the
edge of insolvency. Two weeks ago, he told a crowd of worried
pensioners they are almost certain to lose a portion of their
savings. Along with 84,000 other Executive Life annuity holders
in 46 states, Lillian Finan, 69 and now living month to month,
worries whether she will lose her only steady income. "What am
I going to do?" she wonders. "Is somebody going to give me a
job? And why should I have to do that after my husband and I
worked so hard for all of those years?"

    The collapse of Executive Life is only the most
spectacular blow currently shaking the security of the American
pension system. Last week Dallas-based LTV (1990 sales: $6.1
billion) announced plans to sell off its large
aerospace-and-defense company, which helps make Stealth bombers
and Boeing jets, to raise enough cash to fund the pensions of
its 70,000 retired steelworkers. The firm has been mired in
bankruptcy proceedings since 1986, primarily because of those
obligations. In Los Angeles, First Capital Holdings, an
insurance holding company whose failing California operating
division was seized two weeks ago by insurance officials, sought
Chapter 11 protection, sending chills up the backs of 62,000
annuity holders in 49 states. Amid a flurry of lawsuits and
anguished questions across the U.S., a House subcommittee has
begun to look at how the failure of insurance companies
endangers pensions.

    What is going on here? For millions of retirees, a
pension, along with the requisite gold watch, is a tacit reward
for a lifetime of company loyalty, a bedrock foundation against
poverty in old age. Suddenly, though, employees and retirees of
some of America's largest corporations fear that the pensions
they were counting on may not be there when they need them. If
Executive Life's failure is not frightening enough for
Americans, some 50 large companies, including LTV, Chrysler,
Bethlehem Steel and Uniroyal Goodrich, have seriously
underfunded their pension plans and jeopardized the security of
their own retirees.

    At least those plans are covered by federal insurance. But
of the 10 million retired U.S. workers, the General Accounting
Office has estimated that 3 million to 4 million rely on income
from annuity contracts instead of getting their pension checks
directly from their companies. Having had no say in their
companies' decisions to replace their pensions with
insurance-company annuities, these retirees are learning that
their former employers shucked all legal responsibility for
continued payments to them in the process. Worse, the same
switch cut them off from the government's Pension Benefit
Guaranty Corporation (PBGC). Instead, annuity holders are
covered by a hodgepodge of state insurance regulations that in
some cases offer no protection at all for the $50 billion worth
of insurance annuities that cover retirees and workers.

    The financial threat now looming over so many elderly
Americans had its roots largely in the tumultuous restructuring
that jostled corporate America during the 1980s. In many cases
corporations scrambling for cash shut down their pension plans
and pocketed the so-called excess funds. Some clearly acted
irresponsibly, imperiling the future security of aging members
of the corporate family for quick financial gain. Others
terminated the plans as a defensive measure against hostile
takeovers, knowing that the buyout buzzards circling overhead
saw the cash from their well-stocked pensioners' funds as a
tempting target and were eager to pick them clean.

    Even as some employers were buying annuities to replace
their pension plans, the insurance industry was running into
financial hardship. Since 1975 no fewer than 170 insurance
companies have gone under, 40% of them during the past two years
alone. The vast majority of these failed companies were small
and regional, and no retirees suffered losses. One reason: other
insurers stepped in voluntarily to pick up the pieces, ensuring
continued payments to annuity owners.

    But the industry's tidy record was torn to shreds with the
explosion of Executive Life in the largest insurance-company
failure in U.S. history. Dismissing the steady-as-she-goes
financial procedures of most insurers, Executive Life had blazed
a fast track to spectacular growth, grabbing market share by
offering higher payouts on annuities and charging lower fees
than most of its competitors. To meet its growing obligations,
the insurer plunged headlong into the high-yield bond market
controlled by Drexel Burnham's Michael Milken and puffed up its
$10.1 billion asset base with $6.4 billion in risky junk bonds.
Once the junk-bond market fizzled in 1989, First Executive
Corp., Executive Life's holding company, began to sustain huge
losses. California insurance officials are now investigating
other large insurers to determine whether they also are too
heavily invested in junk bonds.

    During its heyday, Executive Life swam with the sharks.
When raider Charles Hurwitz took over San Francisco-based
Pacific Lumber in 1986 with the help of $900 million in Drexel
junk bonds, for example, First Executive Corporation, bought
more than one-third of those bonds. Once in charge, Hurwitz
terminated the pension plan and grabbed the $55 million worth
of surplus pension funds to pay down part of his buyout debt.
He then bought $38 million worth of Executive Life annuities to
cover 2,500 people, thus shedding his obligations and saving
himself the cost of the premiums for the federal pension
insurance. Had he picked another insurer, of course, those
annuities might have been sound. Instead, Pacific Lumber's
retirees lost their federal pension insurance and in exchange
got annuities from an insurer barreling toward collapse.

    Similarly, when corporate raider Ronald Perelman seized
Revlon in 1985, First Executive helped finance the $2.7 billion
takeover, buying $370 million worth of Drexel's junk bonds.
Perelman shut down Revlon's pension plan and skimmed off at
least $50 million in "excess funding." He then rolled existing
pension obligations into Executive Life annuities. Says Eli
Schefer, a retired Revlon engineer in Sands Point, N.Y.: "Those
were cozy deals, not done according to fiduciary standards.
These guys should be thrown in jail. Now that I am almost 72,
I've got to worry about when my next pension check is coming,
and from where it is coming. It's outrageous."

    Some 62,000 First Capital annuity holders in 49 states
know exactly what he means. Pensioners whose retirement savings
are locked in the wreckage must now wait to see what they will
be able to recover. Like Executive Life, First Capital invested
recklessly in risky high-yield bonds: 46% of its assets are
junk.

    Tragic as the situation gripping holders of Executive Life
and First Capital annuities may be, the U.S. pension system is
largely stable. More than $1 trillion in assets currently backs
roughly $900 billion in pension liabilities. Those assets are
supported in turn by the financial strength of the corporations
funding the plans.

    Since 1974 the Department of Labor has exercised oversight
authority, seeking to ensure that plans are operated in the best
interests of their participants. When companies are unable to
pay pension benefits, the PBGC steps in to meet the obligations,
guaranteeing payment of up to $2,250 per month to eligible
retirees.

    But at present the agency is faced with the daunting
prospect of several dozen large plans -- representing 3 million
active and retired workers -- that are underfunded to the tune
of $30 billion. Worst of all is a class of financially weak
corporate behemoths, such as LTV and Chrysler, whose pension
plans are severely short of cash. Unless their sales and profits
improve, some of these large funds could collapse. Already
running a deficit of $1.8 billion, the PBGC estimates its
deficit could grow to $8 billion by the end of this decade.

    Maybe more. Testifying before Congress last week,
California's Garamendi pleaded for aid for the victims of
Executive Life's collapse. Garamendi contended that the PBGC
bears some responsibility for those annuity payments, since it
supervised the termination of pension plans in which federally
guaranteed benefits were replaced by insurance annuities. Said
he: "Doubtless there are some villains in this piece. Venal
businessmen, negligent regulators, careless rating companies,
crafty accountants and lawyers, greedy pension-plan sponsors are
all candidates, and if punishment is due, it should be meted
out. But that's not going to solve the giant human problem we
face. None of the bad guys has the resources to make thousands
of pensioners whole."

    Who should bear the responsibility? The Department of
Labor is not willing. The agency argues that it does not
regulate insurance companies and points to the industry-rating
companies that continued to give Executive Life very high marks
throughout the period when the pension plans were being
converted to its annuities. Meanwhile, in Oakland a group of
Executive Life's annuity holders are suing the insurer, the
employer that converted their pensions to those annuities and
the California Department of Insurance for allowing it.

    To protect retirement savings in the future, new Labor
Secretary Lynn Martin would like to extend federal pension
coverage to 42 million American workers who currently have none.
In addition, she intends to protect against corporate pension
abuses by forcing employers to fund the plans adequately.

    Tighter regulation of pension plans is sorely needed. The
U.S. cannot afford another massive bailout program. In
addition, as the population ages, U.S. workers will face a
growing burden of responsibility to care for the aged. Those
hard-earned pensions represent more than precious protection for
elderly Americans: they are also assets that the U.S. cannot
afford to squander.