Many companies end pension plans to use `excess' cash. Workers say practice undercuts security

Last year over 200 companies terminated pension plans in order to use excess revenues for reinvestments - often to participate in the currrent binge of corporate buyouts. Twenty-six percent of those companies failed to set up new plans for their workers. And it's all perfectly legal.

A Labor Department spokesman says that employers have two basic rights when it comes to funding a pension plan: ``The right to start it and the right to stop it.''

During this decade hundreds of companies have exercised the latter right and tapped billions of dollars in surplus pension funds.

After a plan is terminated workers and retirees are entitled to the benefits earned up to that point. The company may buy annuities from an insurance company to cover the benefits or in some circumstances pay a lump sum settlement to individuals.

Groups representing retirees and workers say the practice is a violation of trust. They say that the money belongs to them and that the use of surplus funds to finance mergers, acquisitions, and leveraged buyouts - which often result in the loss of jobs at both the acquired and the acquiring companies - is a fundamental affront to workers.

The corporations say that residual pension funds are their money because they fund the pension plans and because they take the risks in the stock market that account for much of the surplus.

Sen. Howard Metzenbaum (D) of Ohio wants a moratorium on these ``pension reversions'' until October 1989. Senator Metzenbaum is seeking to buy time to find a resolution short of dissolved pension plans.

``Since 1981 corporations have removed more than $16 billion from their pension plans to fund mergers, leveraged buyouts, and other non-retirement activities,'' Metzenbaum says. ``These reversions are jeopardizing the retirement security of millions of workers and retirees. Their pension plans are left with no cushion. ... The very promise of a permanent pension program too frequently evaporates.''

Under the measure an overfunded pension plan could not be terminated unless the residual assets were allocated to workers and retirees or placed in an escrow account. The escrow would not receive special tax treatment. The bill does not prohibit normal business pension transactions. But it prohibits assets from being used by corporations as a cheap source of discretionary capital.

Under current law companies cannot draw from active pension plans unless they terminate them.

The legal ability to make use of surplus pension funds was discovered in 1980 by some German financiers who bought the A&P food-store chain. They were able to siphon some $273 million from a pension fund. The practice skyrocketed from nine companies in 1980 to 584 companies in 1985. In 1986, 264 firms terminated plans to get at the excess while in 1987 the number of companies fell to 212.

Sharon Canner at the National Association of Manufacturers (NAM) says that, since the number of companies exercising this option is diminishing, the government moratorium is a bad idea. She says companies may need to get at that money for plant expansion and that the federal Treasury will lose $300 million in projected taxes on terminations.

Reversions can only be done with ``defined benefit plans'' or plans that promise to pay a specific amount at retirement according to a formula based on a worker's age and years of service.

After paying the workers, taxes, and administrative costs, the company has no obligation to establish a new pension plan and the excess can be used for whatever purpose the company wants.

Ms. Canner says the surplus in corporate pension funds was created mostly by the boom in the stockmarket during the 1980s and from employers' overfunding plans in anticipation that employees would stay with the company for the duration of their working lives. She says companies, ``take all the risk because regardless of what happens in the stockmarket they still have to pay the promised benefit.''

Judy Schub of the American Association of Retired Persons (AARP) and Gloria Della of the Department of Labor both contend that terminations don't make good on that promise because they abort benefits before they have a chance to mature.

They argue that because the terminations don't take into account the years remaining in a person's working life, inflation, or cost-of-living increases, the result is a short-changed worker.

New plans start from scratch. In ``many reversion cases,'' says Ms. Della, the new plans don't offer the same level of benefits.

A hypothetical analysis conducted by the Policy Center on Aging for AARP concluded that benefit losses for a younger worker are extremely large.

For a 30-year-old worker the estimate was a loss of 96 percent in a final average earnings plan. The loss in benefits to a 45-year-old worker were assessed at 73 percent of the benefit.

``That can't be conclusively proved,'' says NAM's Canner. ``The idea that a new plan will be funded at a lesser benefit is a hard assumption to substantiate.''

A spokesman at the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures plans in the event of a company's going bust or underfunding a pension plan, says that ``in many instances the plans were superceded by identical plans.''

Ms. Canner concedes, however, that terminations are a ``dumb idea to begin with, because it encourages companies to [permanently] close down plans.''

The Labor Department proposed eliminating terminations and allowing companies to draw part of the surplus in pension funds, but Congress adjourned before taking up the proposal.

Current initiatives include a proposal to use the surplus to fund retiree health benefits. The problem with that proposal, says Deborah Chollet at the Employee Benefits Research Institute, is ``health-service inflation could exceed the value of the benefit.''