The Great Retirement Heist?

Ellen Schultz, an award-winning Wall Street Journal reporter and author of Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, was interviewed on Yahoo Daily Ticker on Monday discussing the retirement heist, how US pensions were plundered by corporate greed:

It's pretty obvious times are tough for America's working class. The combination of a prolonged period of stagnant wages, high unemployment and shaky economy - including a decade of little or no returns (if you're lucky) on assets like stocks and real estate - make it harder to pay the bills. (See: As America's Middle Class Shrinks, P&G Adopts "Hourglass" Strategy)

Meanwhile, New York Times columnist and economist Paul Krugman, noted in a piece last week titled "The Social Contract," that while the middle gets squeezed, the rich keep getting richer in both real and relative terms.

"...the Congressional Budget Office — which only go up to 2005, but the basic picture surely hasn't changed —show that between 1979 and 2005 the inflation-adjusted income of families in the middle of the income distribution rose 21 percent. That's growth, but it's slow, especially compared with the 100 percent rise in median income over a generation after World War II. Meanwhile, over the same period, the income of the very rich, the top 100th of 1 percent of the income distribution, rose by 480 percent. No, that isn't a misprint. In 2005 dollars, the average annual income of that group rose from $4.2 million to $24.3 million."

If the average worker didn't have enough to worry about, Ellen Schultz - an award-winning Wall Street Journal reporter and author of Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers -- says that in some instances the fat paychecks of the top paid executives are coming directly out of the pocket of average workers.

"As recently as a decade ago there was a trillion dollars, a quarter of a trillion in surplus assets," in corporate funds, Schultz tells The Daily Ticker's Aaron Task in the accompanying clip. "There was plenty of money in pension plans; there was plenty to pay the benefits but corporations went about taking the money away."

As the title of the book suggests, Schultz believes this was no accident, claiming corporations have been "exaggerating their retiree burdens" and plundering retirement plans in a variety of ways, including:

• Siphon billions of dollars from their pension plans to finance downsizings and sell the assets in merger deals.
• Overstate the burden of rank-and-file retiree obligations to justify benefits cuts, while simultaneously using the savings to inflate executive pay and pensions.
• Hide growing executive pension liabilities, which at some companies now exceed the liabilities for the regular pension plans.
• Purchase billions of dollars of life insurance on workers and use the policies as informal executive pension funds. When the insured workers and retirees die, the company collects tax-free death benefits.
• Exclude millions of low-paid workers from 401(k)'s to make the plans more valuable to the top-paid.

According to Schultz, these and related measures have become commonplace among Fortune 500 companies, including AT&T, Bank of America, JP Morgan, IBM, Cigna, General Motors, GM, Comcast, UPS and the NFL, just to name a few.

U.S. corporate pension plans now face a $388 billion gap based on a recent report from Credit Suisse. That's a bigger hole than they faced at the height of the financial crisis. Companies claim it's a result of the 2008-09 stock market crash, higher costs and an aging workforce.

Schultz claims that's bogus. "It didn't have to happen," she says, noting executive compensation has risen dramatically over the same time frame. "As they've cut other people's benefits with pensions being frozen, they have increased the benefits of the executives both pay and pensions."

Unfortunately, there isn't much the average employee can do because what the corporations have done is legal and abetted by loopholes in accounting regulations. The only advice she offers is to be skeptical if you're offered a buyout. That means conferring with an actuary to guarantee the pay structure is as advertised.

You can watch the interview below. Ms. Schultz is absolutely right, US corporations have plundered their pensions, all under the watchful eye of pension regulators, padding their earnings, inflating executive pay and engaging in all sorts of questionable practices. Some will dismiss this as an exaggeration but the truth is that corporate pensions were routinely plundered and workers will never see that money again. And now that there is no more money left to plunder, corporations have decided to dump defined-benefit plans and move into less costly and more risky defined-contribution plans, shifting the retirement burden onto workers and leaving them at the mercy of this volatile wolf market.

The mismanagement at pensions is what got me started on this blog. I began by documenting abuses at public pension funds where senior managers took stupid risks to trounce their bogus benchmarks in private and public markets and collect outrageous bonuses typically based on 4-year rolling returns. The great retirement heist is more complicated than people can possibly fathom as it involves many players, including greedy investment bankers, corrupt rating agencies, inept regulators, big banks ripping off pensions, leveraged ETFs, high-frequency trading and naked short-selling thieves profiting in this wolf market, and pensions trying to emulate endowment funds, listening to their incompetent pension consultants, blindly shoveling billions into alternative investments like hedge funds and private equity funds, feeding the pension Ponzi and getting roasted during the 2008 crisis (also see my comment on the Mother of all stealth scams).

I'm thinking of writing my own book on pensions beginning with the day I got fired from a major Canadian public pension fund after warning them of the looming credit crisis an the stupid risks they were taking in their credit portfolio. It was during the summer of 2006 when I presented my research on CDO-cubed and CDO-squared and realized this is one gigantic mess which will blow up in a spectacular fashion (even warned the salesmen at Goldman, the investment bank which subsequently profited from the credit crisis while the pension fund I worked at lost billions in its credit portfolio. Makes you wonder whether Goldman truly rules the world).

Of course, nothing prepared me for the disaster that was about to unfold. The frightening speed of deleveraging, the enormous losses that rocked all institutional funds and the serious damage to the world's credit markets which continue to impact the real economy showed me that the global economy is extremely vulnerable to what is going on in financial markets and decisions pensions and other institutional funds take.

Unfortunately, nothing has changed. Underfunded pensions are taking riskier bets to make up for the losses they suffered back in 2008, hoping that some miracle will occur and another great bull market in stocks and other assets is on its way. They're in for a great disappointment and so are their plan sponsors and contributors. It's going to be impossible to achieve their rosy investment targets and taking riskier bets will leave them exposed to extreme downside risk at a time when they should be taking all necessary measures to limit downside risk, especially since most of these mature pension plans "betting the ranch" are chronically underfunded and need money to pay out retirement payments. It's not the time to take stupid risks with pensions.

I will be in New York City in late October/ early November at the IQPC Pension Risk Management Forum. I was asked to moderate a panel discussion on pension governance for underfunded pensions. Even though markets are volatile and people are very busy, I urge my readers to take part in this conference because several important topics on pension risk management will be discussed and there will be some excellent speakers at this conference. Look forward to meeting many of you who will attend and exchange more ideas on managing pension risk during these difficult and volatile times.