DennisBeaverAugust 3, 2013 • By Dennis Beaver

All employees in today’s America who have been promised a pension have reason to be afraid of what happens if their employer gets into trouble or fails to properly pay into its pension fund. As we will make clear, this is the time to be proactive, to find out what is happening with your pension.

A pension crisis faces even the financially strongest companies, counties, cities and states. For most employees, pensions in America have become a failed experiment, a historical footnote, a ship sunk by incompetence, dishonesty and fraud. And it all began at a time in our nation’s recent history when a solemn promise was made by employers to their employees:

“Work diligently, be loyal, and you will retire well taken care of. There is little need to save much money for retirement, so just enjoy life. Your future is secure.”

Americans, a trusting, hardworking people by nature, believed the promises, stayed with their employers and spent their money because of that promise. And then came failures of century-old legacy companies such as Bethlehem Steel and airlines whose planes were shining examples of all that was great about America.

Their retirees saw pensions slashed or evaporate completely. Today, just look at city and county bankruptcies across our country and their underfunded pensions. Now, to escape these enormous liabilities, employers — large and small — are looking for ways to dump pension obligations. The term for it is de-risking.

Retirees at risk when the company de-risks

“How does a company get rid of its pension obligation to employees?” we asked New York-based attorney Edward Stone, one of the few lawyers in the country who specializes in insurance company failures.

“GM and Verizon are perfect examples, as they purchased a group annuity contract from Prudential Insurance and walked away.

“For the employer, it’s a sweet deal. They hand the insurance company a large pot of money and then are off the hook, and this happens often with very little warning or notice to employees. While Prudential may appear sound financially today, who knows what will happen in 10 or 15 years.? Nobody is too big to fail and should Prudential falter, the retirees are the big losers.

“Retirees lose all of the comprehensive protections intended by Congress under the Employment Retirement Income Security Act (ERISA), including the financial safety net provided by the Pension Benefit Guarantee Corp., which steps in to protect employees when a pension fails.

“It would not be at all surprising that AT&T would go the same route.” Stone observes. An email You and the Law received from Helen, a longtime phone company employee, raises the same concerns:

“I have worked for AT&T over 35 years, beginning when I was 20, and one of the reasons that I have remained here so long is the company pension. Along with health care and related benefits, upon retirement I expect to receive a nice monthly check for the rest of my life. These were my earned benefits, not a handout.

“Recently there has been talk that AT&T is going transfer its pension obligations to some insurance company, and retirees would then get an annuity, replacing the company pension.

“But if that happens, and the insurance company gets into financial trouble and can’t make the payments, what happens?  Could we really face losing our pensions, or have them greatly reduced? Do I have reason to be afraid? Can a huge company like AT&T do such a thing without some kind of approval from employees? Don’t we have any say?” Helen asked.

Current law does not protect the employees

Stone has a sobering answer to our reader’s question:

“Current law allows the employer to amend a pension plan and only requires a third party to say XYZ is a good insurance company. Verizon dropped the bomb in October and by December 2012, 41,000 retirees were transferred to a group annuity contract with Prudential, leading to a class action suit in a Texas federal court. Sadly, for the Verizon retirees, many of their highly valid claims were dismissed, though the case is still pending and an appeal is likely.

Nothing wrong with annuities

Stone was quick to underscore that annuities can be a valuable part of retirement planning. “But when pensions are transferred to an insurance company, there are huge risks to retirees who receive a certificate under a group annuity contract,” he said.

Next time we will explain that term and look at just how bad it could be for Helen, GM and Verizon employees — anyone whose pension is offloaded to an insurance company which then fails. And we’ll have advice on steps you can take which might offer some protection for your pension.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.