Ellen Schultz - Retirement Heist

The newsletter told employees that “the new plan is designed to work well for both longer- and shorter-service employees,” provides “steadier benefit growth throughout [the employee’s] career,” and “build[s] benefits faster” than the old plan. “One advantage the company will not get from the retirement program changes is cost savings.” In formal pension documents it later distributed, Cigna reiterated that employees “will see growth in [their] total retirement benefits every year.”

The communications campaign was successful: Employees didn’t notice that their pensions were being frozen, and didn’t complain. “We’ve been able to avoid bad press,” noted Gerald Meyn, the vice president of employee benefits, in a memo three months after the pension change. “We have avoided any significant negative reaction from employees.” In the margins next to these statements, the head of Cigna’s human resources department, Donald M. Levinson, scribbled: “Neat!” and “Agree!” and “Better than expected outcome.”

When employees made individual inquiries, Cigna had an express policy of not providing information. “We continue to focus on NOT providing employees before and after samples of the pension plan changes,” an internal memo stressed. When employees called, the HR staff, working with scripts, deflected them with statements like “Exact comparisons are difficult.”

Cigna wasn’t the only company deceiving employees about their pension cuts, and actuaries who helped implement these changes were concerned, for good reason: Federal pension law requires employers to notify employees when their benefits are being cut. At an annual actuarial industry conference in New York later that year, the attendees discussed how to handle this dilemma. The recommendation: Pick your words carefully. The law “doesn’t require you to say, ‘We’re significantly lowering your benefit,’ ” noted Paul Strella, a lawyer with Mercer, which had advised Cigna when it implemented a cash-balance plan earlier that year. “All it says is, ‘Describe the amendment.’ So you describe the amendment.”

Kyle Brown, an actuary at Watson Wyatt, reiterated that point: “Since the [required notice] doesn’t have to include the words that ‘your rate of future-benefit accrual is being reduced,’ you don’t have to say those magic words. You just have to describe what is happening under the plan…. I wouldn’t put in those magic words.” [4] When later asked to comment about this piece of advice, a spokesman for Watson Wyatt maintained that Brown was actually advocating clear communication to plan participants. “The term ‘magic words’ was a lawyer’s reference to the triggering words in the [disclosure] statute,” he said.

Just to make sure this sunny message had sunk in, in December 1998, Cigna sent employees a fact sheet stating that the objectives for introducing the new pension plan were to:

• Deliver adequate retirement income to Cigna employees

• Improve the competitiveness of our benefits program and thus improve our ability to attract and retain top talent

• Meet the changing needs of a more mobile employee workforce, and

• Provide retirement benefits in a form that people can understand.

The letter went on to say that “Cigna has not reduced the overall amount it contributes for retirement benefits by introducing the new Plan, and the new Plan is not designed to save money.”

This was true, literally. Cigna had indeed not reduced the overall amounts it contributed for retirement benefits. It had lowered the benefits for older workers and increased benefits for younger workers (slightly) and for top executives (significantly). Looked at this way, the plan wasn’t designed to save money, just redistribute it.

The communications campaign was successful. Janice Amara, a lawyer in Cigna’s compliance department, didn’t learn that she had not actually been receiving any additional benefits until September 2000, when she ran into Cigna’s chief actuary, Mark Lynch, at a farewell party for two other Cigna employees. “Jan, you would be sick if you knew” how Cigna was calculating her pension, she recalled him telling her. “Frankly, I was sick when I heard this,” Amara said. Under Cigna’s new pension formula, Amara’s pension would effectively be frozen for ten years.

Cigna was a relative latecomer to the hide-the-ball approach to pension cuts. The cash-balance plan it implemented was initially developed by Kwasha Lipton, a boutique benefits-consulting firm in Fort Lee, New Jersey, as a way to cut pensions without making it obvious to employees.

Helping employers hang on to pension assets had been a Kwasha Lipton specialty for years. In the early 1980s, Kwasha Lipton helped companies like Great Atlantic & Pacific Tea Co. kill their pension plans to capture the surpluses. Pension raiding became more difficult as Congress began implementing excise taxes on the surplus assets taken from the plans, so Kwasha devised the cash-balance plan as a new way for employers to capture the surplus.

Changing to a cash-balance pension plan was a way to boost surplus because it reduced the growth rate of employees’ pensions, and thus their total pensions. Unlike a traditional pension plan that multiplies salary by years of service, producing rapid growth at the end of a career, a cash-balance plan grows as though it were a savings account. Every year, the pension grows at a flat rate, such as 4 percent of pay a year. At a benefits conference in 1984, a Kwasha Lipton partner stated that converting to this formula would “immediately reduce pension costs about 25 percent to 40 percent.”

Bank of America was the first company to test-drive the new pension plan, in 1985. The bank was cash-strapped because of soured Latin American loans and didn’t want to have to contribute to its pension plan. The pension change saved the company $75 million.

The bank’s employees didn’t complain when their pension growth slowed, because they didn’t notice. “One feature which might come in handy is that it is difficult for employees to compare prior pension benefit formulas to the account balance approach,” wrote Robert S. Byrne, a Kwasha Lipton partner, in a letter to a client in 1989.

The cuts were difficult for employees to detect because they didn’t understand how pensions are calculated, let alone these newfangled versions, which appeared deceptively simple.

In reality, cash-balance plans are complex. When companies convert their traditional pensions to cash-balance plans, they essentially freeze the old pension, ending its growth. They then convert the frozen pension to a lump sum, which they call the “opening account balance.” The lump-sum amount (i.e., the “balance”) doesn’t grow each year by multiplying years and pay, both of which would be growing, and thus generating the leveraged growth seen in a traditional pension. Instead, the pension “balance” grows by a flat percentage of an employee’s pay each year, say, 4 percent. Voilà: no more leveraged growth.

Ironically, employers were able to capitalize on the growing popularity of 401(k)s by presenting cash-balance plans as merely 401(k)-style pensions. Cigna told employees that the new cash-balance plan was like a 401(k), only better, because the company made all the contributions and departing employees could cash out their accounts or roll the money into IRAs. Employees didn’t realize that there was no actual “account” receiving actual employer “contributions” or “interest”—just a frozen pension, and a new pension that had a formula producing very low growth, with no leverage. The pension plan was still one big pool of assets, and the only thing that was changing was the formula used to determine how much each employee would get.