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The Complete Letter
Jim Norby to Elaine
Chao Secretary of Labor
Re: Corporate fiduciary
breach
May 22, 2003
The Honorable Elaine L. Chao
Secretary of Labor
U.S. Department of Labor
200 Constitution Avenue, N.W.
Washington, D.C. 20210
Dear Madam Secretary:
It is imperative that your agency commence an immediate investigation
into whether certain companies now pressing for relaxation of ERISA
funding standards have committed violations of ERISA’s fiduciary
requirements and whether those violations played a substantial role in
creating the increased funding obligations they now seek to avoid.
This problem arises because of the introduction of H.R. 1776 by
Representatives Rob J. Portman (R. Ohio) and Benjamin L. Cardin (D.
Md.), which contains numerous technical provisions that would lower the
funding obligations of employers to PBGC-insured pension plans. Among
these provisions, for example, is one that would have the effect of
increasing the discount rate used to measure a defined benefit plan’s
growth in fund assets and thereby lower both the plan’s projected
benefit liabilities and the amount of contributions that must be made by
the plan’s sponsor.
In addition, this problem is exacerbated by the efforts of the airlines
to seek legislation that would defer making catch-up contributions to
their underfunded pension plans, as reported in the Wall Street Journal
of May 6, 2003. Obviously, if the airlines succeed in obtaining this
special treatment, it will embolden other industries, especially those
that perform national security or defense-related functions, to make
similar claims. If successful, the net result of all these efforts to
water down ERISA’s funding rules will be to destabilize the remaining
universe of defined benefit plans and threaten the financial integrity
of PBGC.
Of particular concern is the fact that the provision in the
Portman-Cardin bill that would change the discount rate (from one
derived from a 30-year Treasury bond rate to one based on a composite
long-term corporate bond rate) appears to have resulted from a letter
sent to the Secretary of the Treasury John Snow on February 14, 2003 by
the ERISA Industry Committee, the Committee on Investment of Employee
Benefit Assets and the American Benefits Counsel. This letter was also
signed by some of the leading U.S. corporations, including AT&T, Boeing,
Budget Rent-a-Car, Chevron-Texaco, Delta Airlines, Dow Chemical,
Goodyear Tire & Rubber, Hewlett-Packard, International Paper, Lucent,
Motorola, Sears Roebuck, Shell Oil, United States Steel, Verizon, Wells
Fargo Bank and Xerox.
This letter contended that it was urgent to replace the 30-year Treasury
discount rate with a long-term corporate bond rate and that the failure
to do so before the end of the second quarter of 2003 would have a
“dramatic and damaging impact on plans and plan participants, companies,
and the prospects for economic recovery”. The letter also contended that
the continued use of the temporary discount rate of 120% of the
four-year weighted average of 30-year Treasury bond rates was already
“creating dangerous dislocations” and that companies “that do not have
cash available for artificially inflated contributions have decided to
freeze future benefit accruals or are considering such action”. In
addition, the letter contended that the use of the temporary Treasury
rate was “leading many companies to severely restrict near-term spending
plans”, was undermining the ability of companies to proceed with
corporate transaction,” and “future growth”, and “hampering the ability
of U.S. companies to rebuild the economy”.
Most, if not all, of the companies that signed the February 14 letter to
Secretary of the Treasury Snow were sitting on supposedly substantial
surpluses in their pension plans just a few short years ago. As a result
of these surpluses many, if not most of these companies, took funding
holidays for close to a decade. In other words, they did not contribute
a dime to the funding of their pension plans for a very long period of
time, and the result of adopting their proposal to use a discount rate
based on corporate rather than Treasury bonds, as now reflected in the
Portman-Cardin bill, would be to extend these funding holidays, or come
very close to accomplishing the same thing.
Moreover, at the same time that these companies were not contributing to
their plans, they reported these pension surpluses on their financial
statements. This gave the impression that many of these companies were
more profitable than they really were. In fact, some of these companies
were actually unprofitable during the same period of time that, by
incorporating the surplus in their financial reports, they appeared to
be reporting business success.
Indeed, many of the companies signing the February 14 letter provided
their top executives with increased cash bonuses and stock options not
only because their pension surpluses made funding their pension plans
unnecessary, and therefore, improved their cash flow, but also because
the impression of business success fostered by the surpluses led to the
artificial inflation of the companies’ stock values.
For example, as recently reported by columnist Robert D. Novak, one of
the companies signing the February 14 letter, Delta Air Lines boosted
its CEO Leo Mullins’ compensation to $12.9 million at the same time the
company was actually losing $1.3 billion, and it, along with other
airlines, was requesting Congress to provide it with $2 to $3 billion in
federal aid. This led Senator John McCain (R-AZ), among others, to
insist that federal aid to the airlines be accompanied by a cap on
airline executive compensation. It should be also noted that Delta Air
Lines is one of the airlines now positioned to obtain even further
funding relief if Congress grants the airlines a blanket exemption from
having to make special catch-up contributions if their pension plans are
less than 90% funded. Yet, it also should be noted that in 2000, Delta’s
pension plan reported being more than fully funded by actuarial
standards (112.3 percent), but, by the same standards, was only 58
percent funded in 2002.
Ironically, many of the same companies complaining about “artificially”
higher funding obligations supposedly imposed by the current Treasury
bond discount rate showed no such impatience with the “artificially”
high pension surpluses produced by the use of overly-aggressive
actuarial earnings assumptions. In December 2001, Warren Buffett stated
in Fortune magazine “that anyone choosing not to lower assumptions –
CEOs, auditors and actuaries all – is risking litigation for misleading
investors. And directors who don’t question the optimism thus displayed
simply won’t be doing their job”. Mr. Buffett’s company, Berkshire
Hathaway, assumed a pension fund investment rate of return of 6.5% while
most others, including all of those who produced the large pension
surpluses that have since vanished, assumed returns of 9% to 10%.
If, because of unrealistic earnings assumptions, the size of these
pension surpluses was a mirage, then the funding holidays taken by the
companies signing the February 14 letter were undeserved. If realistic
earnings assumptions had been used instead, these same companies would
have been compelled to fund their plans more adequately and would have
found it much harder to award outsized compensation packages to their
key executives. Likewise, they would not be complaining now about
any difficulty in meeting their funding obligations since the lion’s
share of these obligations already would have been discharged, or would
be in the process of being discharged, in accordance with sound
actuarial procedure.
Accordingly, the matter which requires investigation by your agency is
whether any of the companies signing the February 14 letter violated
ERISA’s fiduciary requirements by: (1) imprudently adopting unrealistic
actuarial earnings assumptions and failing to evaluate carefully,
critically or independently, the actuarial advice that led to the
adoption of such assumptions; (2) failing to act in the exclusive
interest of the plan’s participants and beneficiaries by adopting
earnings assumptions that would generate unprecedented pension surpluses
that ultimately could justify the award of increased compensation to the
executives of the company approving the use of such assumptions; (3)
permitting the assets of the plan to inure to the benefit of the
employer and its top executives by adopting unrealistic actuarial
earnings assumptions that would allow the company to avoid making
funding contributions and lay the groundwork for awarding increased
executive compensation; and (4) dealing with the assets of the plan in
violation of ERISA’s specific prohibited transaction rules.
In addition, such an investigation should also determine whether the
actuarial firms involved in advising that unrealistic actuarial earnings
assumptions be adopted did so in the furtherance of aiding and abetting
a scheme to permit the companies to take funding holidays and generate
artificial actuarial surpluses that ultimately could be used to justify
the awards of increased executive compensation. Finally, the manner in
which the so-called pension surpluses were invested should also be
investigated to determine whether their rapid disappearance was caused
in whole or in part by imprudent investment conduct.
Needless to say, coming on the heels of Enron and related scandals, the
granting of funding relief to companies that betrayed their fiduciary
responsibilities would lead to a total collapse of public confidence in
the integrity of private pensions and ERISA. I urge you, therefore, to
act without delay in starting the necessary inquiry.
Sincerely,
A.J. Norby
President
National Retiree Legislative Network
Cc: Hon. Ann Combs, Assistant Secretary
Employee Benefits Security Administration
U.S. Department of Labor
Mr. Steven Kandarian, Executive Director
Pension Benefit Guaranty Corporation
Hon. Peter Fisher
Undersecretary for Domestic Finance
U.S. Department of the Treasury
Mr. Mark Warshawsky
Deputy Assistant Secretary for Economic Policy
U.S. Department of the Treasury
Mr. William Sweetnam
Benefits Tax Counsel
U.S. Department of the Treasury
Mr. Carlos Bonilla
Special Assistant to the President for Economic Policy
The White House
Hon. Kathleen Cooper
Undersecretary for Economic Affairs
U.S. Department of Commerce
Hon. Judd Gregg (R. NH), Chair
U.S. Senate Health, Education, Labor and Pension Committee
Hon. Edward M. Kennedy (D. MA), Rnk. Mem.
U.S. Senate Health, Education, Labor and Pensions Committee
Hon. Charles E. Grassley (R. IA), Chair
U.S. Senate Finance Committee
Hon. Max Baucus (D. MT), Rnk. Mem.
U.S. Senate Finance Committee
Hon. John A. Boehner (R. OH), Chair
U.S. House Education and the Workforce Committee
Hon. George Miller (D. CA), Rnk. Mem.
U.S. House Education and the Workforce Committee
Hon. William M. Thomas (R. CA), Chair
U.S. House Ways and Means Committee
Hon. Charles B. Rangel (D. NY), Rnk. Mem.
U.S. House Ways and Means Committee
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