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Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street Hardcover – March 18, 2008
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There are more than enough experts interviewed and quoted, from pension actuaries and investment bankers to human-resources consultants. And journalist-author (Inside the FDA, 2005; and The Merck Druggernaut, 2005) Hawthorne boasts impeccable credentials, including stints at such well-respected publications as Fortune and Institutional Investor. So why does this exposé on pension-plan terminations by U.S. corporations (occurring usually before bankruptcy decisions are made) seem so, well, inconsequential? It’s true that the federal ERISA regulations leave way too many loopholes, that unions (and companies) cave in to the threat of job loss, and that vulture capitalists eagerly await the dumping of pension plans. In fact, Hawthorne marshals her business case brilliantly, detailing the legal process of restructuring, examples (U.S. Airways, LTV), the pinpointing of “nexts to fail,” and an all-too-short section on solutions. Yet until the mass media produces a coast-to-coast outcry, fueled by both retirees and employees, pensions seem to be headed toward extinction. --Barbara Jacobs
"Will retirement security be an oxymoron for most Americans? Fran Hawthorne's Pension Dumping offers a clear-eyed, provocative look at the critically important world of pensions."
International Editor, The Deal
"Having lived through the S&L crisis, I can't help but wonder what policy makers might have done had they been presented with a concise, cogent description of the gathering of the perfect storm before events unfolded. Fran Hawthorne has written such a book for pension policy makers. Let’s hope they take heed."
—Olena Berg Lacy
Assistant Secretary of Labor for the Pension and Welfare Benefits Administration, 1993–1998
"With clarity and even humor at times, Hawthorne examines a complicated, multifaceted, and often troubling phenomenon with broad current and future implications for companies, workers, retirees, taxpayers, and society as a whole. It is a cautionary tale well worth reading."
—Phyllis C. Borzi
Counsel for Employee Benefits, U.S. House of Representatives, Committee on Education and Labor, 1979–1995
"Fran Hawthorne provides a thought-provoking and lively analysis of bankruptcy laws, specialized investment and capital market strategies, and where pensions fit into the strategies to move troubled companies forward. She discusses how the bankruptcy laws focus on the business in the future and how these laws ignore the rights of employees. She also suggests areas for policy change."
—Anna M. Rappaport, F.S.A., M.A.A.A.
Anna Rappaport Consulting
Past President of the Society of Actuaries
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Amazing how prescient the book is, given that it must have been written before the 2008 collapse was really complete. While airlines were most notorious for dumping pensions prior to the crash, the auto industry did indeed turn out to be the next one facing serious pension challenges, just as Hawthorne predicts in her book.
Her chapter on the flaws in ERISA, the standard law governing private pensions that was finally passed in the early 70s, is excellent, and her chapters on the Bankruptcy Code and its perversities are even better. Both ought to be required reading both for novice pension reporters and for working people and labor organizers working in industries that haven't yet been denuded of traditional pensions.
The overall theme here - one of the most important - is the unintended consequences of various laws (ERISA, the Bankruptcy Code, and the 2006 Pension Protection Act especially). It's enough to make you question the IQs of the people who drafted these laws in begin with, or at least in who's interests they were really working, given the ways they've been exploited. Again, this is a problem I haven't seen explored as thoroughly or competently anywhere outside a textbook or a legal brief.
Hawthorne also does a great job profiling the people who do the exploiting - vulture and private equity investors, traders, etc. We learn something about where they come from and their motivations, yet Hawthorne doesn't caricature them or lapse into being overly judgmental. She quotes several of the most prominent figures extensively, including Wilbur Ross and Shelley Greenhaus, and the reader is left to decide whether they are well-intentioned white knights or something entirely else. The fact that they gave her their time and spoke with her comparatively frankly is obviously a function of how knowledgeable she is on the subject. She also does a fine job of profiling the PBGC - the nation's highly imperfect private-pension insurer - and the conflicted motivations that are baked into it. I was also glad to see someone zero in on the problems of plans that use the flat-dollar benefit calculation system, which I haven't seen much discussed anywhere else.
One virtue of Pension Dumping is that it doesn't bite off too much. This is a book about what happens to traditional pensions when vulnerable companies find themselves in the cross-hairs of Wall Street investors. It's not about the fate of retirement in the U.S., public pension funds - a quite different story - or Social Security. The subject is big and important enough all by itself, and Hawthorne does it thorough justice. Yet she makes quite clear the economic stakes involved: Pensions are almost never the underlying problem with these troubled companies, and dumping them doesn't solve the real issues. Yet the way they have been abused and exploited presents a troubling prospect for anyone concerned about the fate of American workers going forward.
I am here to recommend to you the book Pension Dumping. It is a very good summary of how we got into the mess we in today with respect to Defined Benefit [DB] pension plans. Now, much of the rest of this review will quibble with some aspects of the book, but that does not change my view that for those interested in the topic, and aren't experts now, they will learn a lot from the book. The author, Fran Hawthorne, has crammed a lot of useful information into 210 pages.
The Balancing Act
One of the things that the book gets right is the difficulty in setting pension regulations and laws. In hindsight, it might have been a good idea to give pensioners a higher priority claim in the bankruptcy pecking order. But if that had been done, many companies might have terminated their plans then and there, because of the higher yields demanded from lenders who would have been subordinated.
She also covers the debate on the "equity premium" versus immunization well. Yes, it is less risky to immunize - i.e., buy bonds to match the payout stream. Trouble is, it costs a lot more in the short run. With equities, you can assume that you will earn a lot more.
She also notes how many companies were deliberately too generous with pension benefits, because they did not have to pay for them all at once. Instead, they could put up a little today, and try to catch up tomorrow.
* · Individuals aren't good at managing their own money. Even if a participant-directed 401(k) plan is cheaper than a DB plan in terms of plan sponsor outlay, the average person tends to panic at market bottoms and get greedy at market tops. DB plans and trustee-directed DC plans are a much better option for most people. That said, most people prize the illusion of control, and will not choose what is best for them.
* · Technological progress was probably a bigger factor in doing in the steel industry, and other unionized industries, than foreign competition. Nucor and its imitators did more damage to the traditional steel industry than did foreign competition. With commodity products, low price wins, and Nucor lowered the costs of creating steel significantly.
* · In the analysis of what industries could face pension problems next, she did not consider banks and other financial institutions. Most of those DB plans are very well-funded. Why? They understand the compound interest math, and the variability of the markets. But what if the current market stress led to financial firms cutting back on their plan contributions?
* · She gets to municipal pensions at the end, and spends a little time there, but those face bigger funding gaps than most private plans. Also, she could have spent more time on Multiple Employer Trusts, where funding issues are also tough, and plan sponsor failures leave the surviving plan sponsors worse off.
* · She also thinks that if you stretch out the period of time that companies can contribute in order to fund deficits, it will make things better. In the short run, that might be true, but in the intermediate term, companies that are given more flexibility tend to get further behind in funding DB pensions.
* The book could have spent more time on changes in investing within DB pension plans, which are drifting away from equities slowly but surely, in favor of less liquid investments in private equity and hedge funds. How that bet will end is anyone's guess, but pension investors at least have a long time horizon, and can afford the illiquidity. My question would be whether they can fairly evaluate the skill of the managers.
This book describes the motives of all of the parties in DB pension issues very well, and why they tend to lead to DB plan terminations. There are possible solutions recommended at the end, but in my judgment they might save some plans that are marginal, but not those that are sick. If you are interested in the topic of pensions, buy the book.
Fran Hawthorne first wrote about this issue in the early 1980s and recent events inspired her to return to it and write this helpful and informative book. If you are part of a defined benefit program, a business person who wonders about the ramifications of defined benefit versus defined contribution, or a member of the public just interested in this subject, I think this book would be quite interesting and helpful to you. She explains why and how investors, management, unions, and bankruptcy courts put so little emphasis on helping retirees over present workers. The basic idea is that keeping the company running in some form is usually better than closing it down. Even if it means hurting a lot of people who have worked a lifetime for the rewards promised to them.
Reviewed by Craig Matteson, Ann Arbor, MI