Investments: Is Your Pension Safe?

By Janice Castro

After 33 years with Blue Cross of California, Ray Finan thought his income was secure when he and his wife Lillian, a self-employed medical malpractice attorney, retired in 1984. He never knew that their financial security evaporated when, two years later, Blue Cross terminated its pension plan and instead bought annuities from Executive Life Insurance Co. The checks kept coming all the same. But by the time Ray Finan died in 1988, Executive Life was careering headlong toward financial disaster.

This April, California insurance commissioner John Garamendi seized the $10.1 billion insurer as it teetered on the edge of insolvency. Two weeks ago, he told a crowd of worried pensioners they are almost certain to lose a portion of their savings. Along with 84,000 other Executive Life annuity holders in 46 states, Lillian Finan, 69 and now living month to month, worries whether she will lose her only steady income. "What am I going to do?" she wonders. "Is somebody going to give me a job? And why should I have to do that after my husband and I worked so hard for all of those years?"

The collapse of Executive Life is only the most spectacular blow currently shaking the security of the American pension system. Last week Dallas-based LTV (1990 sales: $6.1 billion) announced plans to sell off its large aerospace-and-defense company, which helps make Stealth bombers and Boeing jets, to raise enough cash to fund the pensions of its 70,000 retired steelworkers. The firm has been mired in bankruptcy proceedings since 1986, primarily because of those obligations. In Los Angeles, First Capital Holdings, an insurance holding company whose failing California operating division was seized two weeks ago by insurance officials, sought Chapter 11 protection, sending chills up the backs of 62,000 annuity holders in 49 states. Amid a flurry of lawsuits and anguished questions across the U.S., a House subcommittee has begun to look at how the failure of insurance companies endangers pensions.

What is going on here? For millions of retirees, a pension, along with the requisite gold watch, is a tacit reward for a lifetime of company loyalty, a bedrock foundation against poverty in old age. Suddenly, though, employees and retirees of some of America's largest corporations fear that the pensions they were counting on may not be there when they need them. If Executive Life's failure is not frightening enough for Americans, some 50 large companies, including LTV, Chrysler, Bethlehem Steel and Uniroyal Goodrich, have seriously underfunded their pension plans and jeopardized the security of their own retirees.

At least those plans are covered by federal insurance. But of the 10 million retired U.S. workers, the General Accounting Office has estimated that 3 million to 4 million rely on income from annuity contracts instead of getting their pension checks directly from their companies. Having had no say in their companies' decisions to replace their pensions with insurance-company annuities, these retirees are learning that their former employers shucked all legal responsibility for continued payments to them in the process. Worse, the same switch cut them off from the government's Pension Benefit Guaranty Corporation (PBGC). Instead, annuity holders are covered by a hodgepodge of state insurance regulations that in some cases offer no protection at all for the $50 billion worth of insurance annuities that cover retirees and workers.

The financial threat now looming over so many elderly Americans had its roots largely in the tumultuous restructuring that jostled corporate America during the 1980s. In many cases corporations scrambling for cash shut down their pension plans and pocketed the so-called excess funds. Some clearly acted irresponsibly, imperiling the future security of aging members of the corporate family for quick financial gain. Others terminated the plans as a defensive measure against hostile takeovers, knowing that the buyout buzzards circling overhead saw the cash from their well-stocked pensioners' funds as a tempting target and were eager to pick them clean.

Even as some employers were buying annuities to replace their pension plans, the insurance industry was running into financial hardship. Since 1975 no fewer than 170 insurance companies have gone under, 40% of them during the past two years alone. The vast majority of these failed companies were small and regional, and no retirees suffered losses. One reason: other insurers stepped in voluntarily to pick up the pieces, ensuring continued payments to annuity owners.

But the industry's tidy record was torn to shreds with the explosion of Executive Life in the largest insurance-company failure in U.S. history. Dismissing the steady-as-she-goes financial procedures of most insurers, Executive Life had blazed a fast track to spectacular growth, grabbing market share by offering higher payouts on annuities and charging lower fees than most of its competitors. To meet its growing obligations, the insurer plunged headlong into the high-yield bond market controlled by Drexel Burnham's Michael Milken and puffed up its $10.1 billion asset base with $6.4 billion in risky junk bonds. Once the junk-bond market fizzled in 1989, First Executive Corp., Executive Life's holding company, began to sustain huge losses. California insurance officials are now investigating other large insurers to determine whether they also are too heavily invested in junk bonds.

During its heyday, Executive Life swam with the sharks. When raider Charles Hurwitz took over San Francisco-based Pacific Lumber in 1986 with the help of $900 million in Drexel junk bonds, for example, First Executive Corporation, bought more than one-third of those bonds. Once in charge, Hurwitz terminated the pension plan and grabbed the $55 million worth of surplus pension funds to pay down part of his buyout debt. He then bought $38 million worth of Executive Life annuities to cover 2,500 people, thus shedding his obligations and saving himself the cost of the premiums for the federal pension insurance. Had he picked another insurer, of course, those annuities might have been sound. Instead, Pacific Lumber's retirees lost their federal pension insurance and in exchange got annuities from an insurer barreling toward collapse.

Similarly, when corporate raider Ronald Perelman seized Revlon in 1985, First Executive helped finance the $2.7 billion takeover, buying $370 million worth of Drexel's junk bonds. Perelman shut down Revlon's pension plan and skimmed off at least $50 million in "excess funding." He then rolled existing pension obligations into Executive Life annuities. Says Eli Schefer, a retired Revlon engineer in Sands Point, N.Y.: "Those were cozy deals, not done according to fiduciary standards. These guys should be thrown in jail. Now that I am almost 72, I've got to worry about when my next pension check is coming, and from where it is coming. It's outrageous."

Some 62,000 First Capital annuity holders in 49 states know exactly what he means. Pensioners whose retirement savings are locked in the wreckage must now wait to see what they will be able to recover. Like Executive Life, First Capital invested recklessly in risky high-yield bonds: 46% of its assets are junk.

Tragic as the situation gripping holders of Executive Life and First Capital annuities may be, the U.S. pension system is largely stable. More than $1 trillion in assets currently backs roughly $900 billion in pension liabilities. Those assets are supported in turn by the financial strength of the corporations funding the plans.

Since 1974 the Department of Labor has exercised oversight authority, seeking to ensure that plans are operated in the best interests of their participants. When companies are unable to pay pension benefits, the PBGC steps in to meet the obligations, guaranteeing payment of up to $2,250 per month to eligible retirees.

But at present the agency is faced with the daunting prospect of several dozen large plans -- representing 3 million active and retired workers -- that are underfunded to the tune of $30 billion. Worst of all is a class of financially weak corporate behemoths, such as LTV and Chrysler, whose pension plans are severely short of cash. Unless their sales and profits improve, some of these large funds could collapse. Already running a deficit of $1.8 billion, the PBGC estimates its deficit could grow to $8 billion by the end of this decade.

Maybe more. Testifying before Congress last week, California's Garamendi pleaded for aid for the victims of Executive Life's collapse. Garamendi contended that the PBGC bears some responsibility for those annuity payments, since it supervised the termination of pension plans in which federally guaranteed benefits were replaced by insurance annuities. Said he: "Doubtless there are some villains in this piece. Venal businessmen, negligent regulators, careless rating companies, crafty accountants and lawyers, greedy pension-plan sponsors are all candidates, and if punishment is due, it should be meted out. But that's not going to solve the giant human problem we face. None of the bad guys has the resources to make thousands of pensioners whole."

Who should bear the responsibility? The Department of Labor is not willing. The agency argues that it does not regulate insurance companies and points to the industry-rating companies that continued to give Executive Life very high marks throughout the period when the pension plans were being converted to its annuities. Meanwhile, in Oakland a group of Executive Life's annuity holders are suing the insurer, the employer that converted their pensions to those annuities and the California Department of Insurance for allowing it.

To protect retirement savings in the future, new Labor Secretary Lynn Martin would like to extend federal pension coverage to 42 million American workers who currently have none. In addition, she intends to protect against corporate pension abuses by forcing employers to fund the plans adequately.

Tighter regulation of pension plans is sorely needed. The U.S. cannot afford another massive bailout program. In addition, as the population ages, U.S. workers will face a growing burden of responsibility to care for the aged. Those hard-earned pensions represent more than precious protection for elderly Americans: they are also assets that the U.S. cannot afford to squander.

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CREDIT: TIME Charts by Steve Hart

[TMFONT 1 d #666666 d {Source: PBGC}]CAPTION: 10 RISKY PENSIONS

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CREDIT: TIME Charts by Steve Hart

CAPTION: OTHER PLACES TO INVEST YOUR SAVINGS

With reporting by Gisela Bolte/Washington and Dan Cray/Los Angeles