During his 43 working years at Getty Oil, William J. Higgins helped design the company's pension fund, watched it change over the decades and counseled hundreds of colleagues on how to prepare for the financial uncertainties of retirement.
But now in his own retirement, Higgins worries about his financial future--and the prospects of those he counseled.
The reason is that Texaco officials, who took over Getty, seek to withdraw $250 million from the $689-million Getty pension fund. They want to use the money elsewhere in the combined company, and say they will buy annuities from an insurance firm to provide for the retirement benefits. Many former workers worry because the move could mean an end to inflation adjustments in their benefits and because the annuities are not federally insured.
"There's great concern among the retirees," said Higgins, 66, who retired at the end of 1983. Texaco's managers "owe no allegiance to the Getty people. The retirees never even worked for Texaco."
What Texaco managers have done is ask the government's permission to execute an increasingly popular corporate maneuver: siphoning "excess" cash out of a pension fund--money considered above what is necessary to pay its legal obligations--and apply the windfall to other expenses.
In the last five years, nearly 400 companies employing more than 450,000 workers have scooped $3.5 billion out of their pension funds. The Labor Department currently is considering applications by 223 companies with 200,000 employees to remove $2 billion more.
But critics, such as Rep. Edward Roybal (D-Los Angeles), warn that the financial security of individuals in pension programs may be jeopardized when companies use retirement funds as corporate piggy banks. The House Aging Committee chairman and others cite these dangers:
- Retirees' ability to keep up with inflation may be weakened. Getty and other companies typically have provided inflation increases to their retirees as a discretionary benefit, a good will gesture that is not required by law. But when funds are cut to the bare-bones minimum to pay current obligations, nothing may be left for future cost-of-living hikes.
- The ultimate size of retirement benefits may be uncertain. After withdrawing the extra money, companies often modify their pension programs. Instead of spelling out the precise benefit to be counted on, companies may promise only to contribute a set amount toward the pension. Benefits will then be determined by the vagaries of future interest rates and other market factors. "If you retire six months ahead of me, and then the (stock) market goes to hell, I might get a much smaller pension than you," said David M. Walker, acting executive director of the federal Pension Benefit Guaranty Corp., which insures certain kinds of pension plans.
- Some workers may lose the more generous benefits that go with seniority. This can happen if a company starts up a new program without offering credit for past service. A Labor Department study found that a worker could give up 45% of his potential retirement benefit this way, although officials say it is not a common problem.
It's easy to see why employers want to withdraw the excess money. Pension funds, generally financed by employers' tax-free contributions, are weighty investment portfolios, typically a mix of stocks, bonds and other assets that rise and fall in value. The value of many, enriched by healthy stock market profits and interest earnings on bonds and bank deposits, have risen markedly in recent years and are endowed with far more money than would be needed to pay off their pension obligations if the plans were terminated today.
Companies can use the windfall to buy equipment, pay debts, or finance other corporate needs. More and more, companies look at the funds as factors to be considered in takeover strategies and defenses.
A Key Consideration
Norman Weinger, an analyst with Oppenheimer & Co., told a group of investors and securities experts in Los Angeles last week that he considers a company's pension fund a key asset in determining the firm's desirability as a takeover target.
Weinger used United Airlines to illustrate the point, pegging its market value at about $1.5 billion and estimating that its pension fund harbors an extra $1 billion. With that money alone, a corporate raider could go a long way toward hauling off the airline.
"Where you have an overfunded fund, you have a bargain in the making," he said, warning: "If the pension fund is underfunded, don't touch it."
Actually, the current activity was spawned less by takeover strategy than by the tough economic times of 1981 and 1982, when companies searched hard for untapped sources of cash, said Henry Bright of Wyatt Co., an employee benefit consulting firm. Pension funds began swelling as the stock market recovered.