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Using Pension Funds for Buyouts
Using overfunded pension money to tempt workers into retirement with lump-sum packages allows employees to defer taxes. But it can be a risky venture in today's up-and-down stock market climate.
The decision by several Detroit automakers to use pension funds to offer workers lump-sum retirement packages may have some unintended results in this volatile economic market. In yet another effort to cut labor costs, Chrysler LLC and General Motors Corp. have offered the packages to retirement-eligible employees, using their now-overfunded pension funds, the Detroit Free Press reported last week. Chrysler spokeswoman Michele Tinson told the Free Press that this is the first time that automaker had used pension money for retirement incentives. Earlier this year, the company offered $70,000 lump-sum retirement payments out of corporate funds. But local UAW members told the newspaper they were reluctant to take the money because it is taxable. Because the new packages come out of the pension fund, employees can put the money directly into a retirement account such as a 401(k), deferring taxes. The picture is the same at GM, which is using pension fund money for lump-sum payments of $45,000 and $62,500 to retirement-eligible production workers and skilled-trades workers, respectively. "We're taking advantage of the overfunded status, and it certainly helps with regard to not having to tap into corporate cash," GM spokesman Dan Flores told the Free Press. The move is not unprecedented, say experts. But it may have repercussions. "As a practical matter, one primary reason employers have sponsored pension plans is to encourage early retirement," says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute in Washington. Prior to the 1970s, incentives were paid in lifetime annuity form; by the 1980s, single-sum payments plus enhanced annuities were used to get people to retire sooner, Salisbury says. "[It's] as old as defined-benefit plans." In the booming economy of the 1990s, in particular, many companies constructed buyout packages using then-overfunded pension funds. However, today's market is far more volatile, and some experts wonder if this temporary solution might have ramifications for future retirees. "We never did that. ... We were always underfunded. We had no excess pension funds, even if we wanted to," says Gerald Meyers, a business professor at the University of Michigan, who was chairman of American Motors from 1978 to 1982. "I disagree with doing that. You have to ask yourself how they got to be overfunded. ... The [Chrysler] fund is probably overfunded because of the over-inflated value of the stock or securities that have been invested. ... The pension fund value fluctuates. ... Now that the stock market and the real estate market is going down, it's not unlikely it will be underfunded in short order." There's nothing wrong with using pension money to fund retirement packages, "as long as there is no unfunded liability, and the [automaker funds] appear to be overfunded," says labor relations consultant Bill Adams of Adams, Nash, Haskell & Sheridan in Covington, Ky. The bigger issue, he says, is the automakers' continued "collusion" with the unions about work issues in general. "The automaker is stomping on the ants, and the bears are walking off with the picnic. ... They're worried about the wrong thing. They can't dump the relationship with the UAW. They're going out of business and delaying the inevitable." As for the benefit to workers of a tax-free buyout, Adams says: "I think it's debatable. There are limits on what you can put in a 401(k). ... They will not dodge the tax, just defer it. That's not a silver bullet. The government is going to get its share."
March 31, 2008 Copyright 2008© LRP Publications |
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