Aetna's 1st-Quarter Results "Solid," Analysts Say

By Diane Levick, Hartford Courant Staff Writer
April 25, 2008

[For Aetna's own report on 1st-quarter results click here.]

Aetna's net income dropped less than 1 percent in the first quarter, to $431.6 million, as membership and premiums grew but were offset by investment losses.

Hartford-based Aetna raised its estimate Thursday on 2008 enrollment growth and reaffirmed previous guidance on operating earnings, unlike competitors WellPoint and UnitedHealth Group, which had lowered forecasts.

Aetna's first-quarter operating earnings, which exclude realized investment gains and losses, grew 7.85 percent from a year earlier. Earnings per share matched analysts' consensus.

Analysts called the quarter "solid," and some expected the company's stock to trade higher Thursday. But after opening higher, the stock fell as much as 5.8 percent before closing down 83 cents, or about 2 percent, at $42.26 a share. The stock had gained $2.71 on Wednesday.

"Investors should appreciate the stable earnings-per-share outlook and strong operating results in context of recent significant negative earnings revisions in the sector," Deutsche Bank senior analyst Scott Fidel wrote in a note to investors before the market opened Thursday.

Aetna's net income of $431.6 million, or 85 cents a share, for the first three months of this year compares with $434.6 million, or 81 cents, a year earlier. Per-share profits are higher because of the company's stock repurchases, which totaled 12.8 million shares in this year's quarter. Net income in the 2008 period included $38 million of net realized capital losses stemming from market value declines of fixed-income investments. Net realized investment losses in the 2007 first quarter were $800,000.

Operating earnings were $469.6 million, or 92 cents a share, in this year's quarter, matching the Thomson Financial analysts' consensus for earnings per share. Operating profits in the 2007 first quarter were $435.4 million, or 81 cents a share.

"We continue to expect 2008 to be another year of solid membership increases and strong earnings-per-share growth, based on disciplined pricing, medical management, operating efficiency and effective capital deployment," Aetna's chief executive, Ronald A. Williams, told analysts on a conference call Thursday. He noted that Aetna is "also mindful of the changing political and economic environment and believe our flexible operating model positions us well to respond to them."

Aetna reaffirmed its forecast of $4 a share in operating earnings for full year 2008.

The company is holding steady on employment, too, ending March with 7,403 employees in Connecticut, compared with 7,365 on Dec. 31. Aetna has 35,258 employees companywide.

Aetna now expects to add 850,000 to 900,000 new health plan members this year, 50,000 more than it previously forecast. The company ended March with 17.5 million members, an increase of 614,000 in the first quarter.

The closely watched medical cost ratio — the proportion of premiums spent on claims — was 79.8 percent for commercial health plans in the first quarter. It was slightly above the 79.6 percent a year earlier, in line with Aetna's projections. Fidel called the ratio "the single most important data point" and "evidence that medical cost trends are stable for Aetna."

Aetna's health care business, alone, posted $461.6 million of first-quarter operating profits, compared with $422.7 million a year earlier. The group business, which includes life and disability insurance, had $34.9 million of operating earnings, compared with $31.1 million a year earlier.

Companywide revenue rose 16 percent, to $7.7 billion, in this year's quarter.

About 20 people who rallied outside Aetna's Hartford headquarters Thursday afternoon weren't pleased by the company's financial results. They protested that although companies such as Aetna make millions in profits, many people cannot afford health insurance. They laid out about 40 pairs of shoes symbolizing some of the 150 Connecticut residents who died prematurely in 2006 because they lacked insurance, according to a recent study by Families USA.

Participants carried signs with such messages as "Save lives now, health care for everyone," and "Their profits equal our premiums."

[ Top of This Page ]

Aetna Chief Makes $40.2 Million in 2007

By Diane Levick, Hartford Courant Staff Writer
April 22, 2008

Aetna's progress and stock performance last year propelled compensation for Chief Executive Ronald A. Williams to $40.2 million, and he also received stock rights that may be worth an additional $10.8 million in the future. A large chunk of the $40.2 million came from $32.8 million of value he realized by exercising stock options granted in past years, according to a proxy filing Monday for Aetna's annual shareholder meeting in Chicago May 30.

Williams, who is credited with directing Aetna's turnaround, received $1.096 million in salary in 2007, about the same as the $1.07 million received in 2006. His annual bonus was $1.9 million for 2007 compared with $1.6 million in 2006. However, in 2006, he also received a $6.12 million cash payout from a long-term incentive plan that has been discontinued.

Another part of his pay package was 100,776 restricted stock units for 2007 valued at $4.29 million. The units vest in installments over three years. Each unit will be paid on its vesting date in one share of Aetna common stock. Other compensation for Williams, totaling $104,162 last year, included personal use of company aircraft and vehicles, financial planning services and the company's matching contributions to a 401(k) plan.

In addition to his $40.2 million package, Williams was awarded 706,124 "stock appreciation units," which vest in installments over three years and have a potential value of $10.78 million, according to the proxy. The units, like stock options, have value only if Aetna's stock trades higher than the units' $42.57 "strike," or exercise, price. For executives to realize the full values of the units, Aetna will have to create $7 billion of shareholder value, based on the number of shares outstanding Dec. 31, 2007, the filing says. Aetna's stock price closed at $42.14 a share Monday.

Unlike options, stock appreciation units don't require the executive to pay an exercise price to use them. The gross value of the units would be the difference between the $42.57 strike price and the market price of shares at the time. The value would be delivered to Williams in the form of Aetna stock..

The proxy says Williams and other executives were rewarded for a "very successful year for the company and its shareholders."

Revenues in 2007 increased 10 percent and operating earnings rose 20 percent from 2006, while health plan membership grew 4.7 percent, excluding acquisitions, the filing says. It also shows Aetna's total return to shareholders — stock price increase and dividends — has significantly beaten competitors and the S&P 500 index over the past five years.

Compensation like Williams' package, though, tends to provoke bitterness among consumers, who believe insurance executives drain precious health care dollars at a time many people can't afford coverage.

However, Aetna spokesman Fred Laberge, referring to the $6.4 billion increase in the company's market capitalization last year, said, "Shareholders, employees, the community, everybody benefits from the success of the company." Aetna's market cap has plummeted with its stock price in a volatile market, falling from $57.73 a share at the end of December to $42.14 as of Monday.

Aetna pays top brass the way it does because "we want to attract, motivate, and retain our highly qualified executives," Laberge said. He added that a "significant portion of executive compensation is at risk because it's based on individual and company performance, and the company has performed very well in Ron Williams' tenure."

Aetna President Mark T. Bertolini's compensation totaled $2.53 million for 2007. On top of that, he was awarded stock appreciation units valued at a potential $7.5 million, the filing says. Unlike Williams, Bertolini didn't exercise stock options last year.

Bertolini's salary was $711,847 in 2007 — the year he was named president — compared with $513,185 in 2006. His annual bonus was $889,884 last year compared with $465,000 in 2006. He also received a $900,000 payout in 2006 under an incentive plan that has been discontinued.

Bertolini's $2.53 million package last year included restricted stock units valued at $900,015. Other compensation came to $26,317 and included personal use of company aircraft and vehicles, and a 401(k) match by the company. He was given two awards of stock appreciation rights last year totaling a projected value of $7.5 million. That includes a July award of 308,642 units valued at $5.2 million related to his promotion to president.

The proxy also shows Williams would be entitled to $33.5 million in payments from Aetna if he is terminated without cause or leaves for "good reason," such as a reduction of base salary or total annual target cash compensation. He would collect an estimated $46.2 million if the company changes hands and he's terminated.

[ Top of This Page ]

Health Insurers Get Poor Marks From Hospitals

UnitedHealth is rated worst of the bunch in a a survey of executives.

By Lisa Girion, Los Angeles Times Staff Writer
March 6, 2008

The nation's biggest health insurers lately have taken to rating hospitals on quality and cost, saying the information can help patients make better choices. Now, hospitals are giving insurers a dose of their ow n medicine.

A survey of hospital executives to be released today found some national insurers have image problems of their own. Three of the nation's five largest insurers had higher negative approval ratings than positive ones, according to the effort to gauge relations between hospitals and the insurers who hire them to take care of their members.

UnitedHealth Group Inc., which has contracts with 96% of the hospitals responding to the survey, was hit with the worst ratings. The Minnetonka, Minn.-based insurer received an "unfavorable" opinion from 91% of the hospital executives who responded, while 8% gave it a "favorable" rating. United owns PacifiCare of California.

Indianapolis-based WellPoint Inc., which owns Blue Cross of California, was second-worst with 48% unfavorable and 20% favorable. Philadelphia-based Cigna received 47% unfavorable and 44% favorable. Hartford, Conn.-based Aetna got the best score with 57% favorable and 37% unfavorable. Other positively rated insurers included Coventry/First Health and regional insurers that were rated as a group.

United challenged the findings and methodology of the report. "UnitedHealthcare ranks above the industry regarding claims payments," said spokesman Tyler Mason, adding that it pays more than 20 million claims a month -- 95% of them within 10 days. "We are working with many hospital systems to improve electronic claims submission to reduce the time to pay claims," Mason said. "Our goal is to work directly and collaboratively with hospitals to decrease administrative cost and complexity so that hospitals receive fair compensation for services at the same time balancing the overall healthcare cost in line with the consumer price index on behalf of our members."

A spokeswoman for Blue Cross parent WellPoint said it was reviewing the survey and that it took it upon itself to stay abreast of hospital executives' opinions through its own surveys. Jan Emerson, a spokeswoman for the California Hospital Assn., said the survey confirmed "what we are hearing from a lot of our member hospitals about health plans that operate in California, particularly the two largest ones, United and Wellpoint."

Davies Public Affairs, a Santa Barbara firm that represents some hospitals, commissioned the survey. It was conducted by Fabrizio, McLaughlin & Associates Inc., a polling firm whose clients include politicians, corporations and the American Insurance Assn. The results were based on interviews with 113 executives representing more than 500 hospitals, or 10% of all U.S. hospitals.

The findings could help consumers shop for coverage, said Brandon Edwards, chief operating officer of Davies. "It's definitely a wake-up call for the employers," Edwards said. "When you pick a health plan for your employees, think very hard about what the health plans' relationships are with their primary providers."

lisa.girion@latimes.com

[ Top of This Page ]

Aetna's Profit Meets Forecasts

By Stephen Singer, Associated Press
February 8, 2008

Managed care provider Aetna Inc. said Thursday that its fourth-quarter profit rose 3 percent from membership growth, premium and fee rate increases and continued cost cuts. Net income grew to $448.4 million, or 87 cents a share, from $434.1 million, or 80 cents a share, a year earlier. Excluding items, profit totaled 88 cents a share in the latest period. Revenue rose 12 percent, to $7.14 billion, from $6.36 billion a year earlier.

Per-share profits matched the expectations of analysts polled by Thomson Financial, although revenue came in below the anticipated $7.17 billion.

The Hartford-based company's combined medical-loss ratio, which measures the amount of money spent on services, compared with the amount of payments collected, widened to 80.3 percent for the fourth quarter from 78.8 percent in the 2006 period. Fourth-quarter total medical membership increased organically by 168,000. Including Goodhealth Worldwide's 58,000 members, total medical membership on Dec. 31 was 16.85 million members, compared with 16.61 million on Sept. 30 and 15.43 million a year earlier.

Aetna forecast first-quarter adjusted earnings of 92 cents a share and 2008 profit of $4; Wall Street expects 94 cents a share and 2008 earnings per share of $4.03. Shares fell $1.32, to $51.96, on Thursday. Wachovia Capital Markets analyst Matt Perry called the sell-off of Aetna shares "unwarranted." Fourth-quarter results, he wrote in a report, "have been challenging for managed care companies, but Aetna's Q4 results are the best yet, in our view."

For 2007, Aetna reported revenue of nearly $27.6 billion, up 9.8 percent from $25.1 billion in 2006. Net income was $1.83 billion, or $3.47 a share, up 7.6 percent from $1.7 billion, or $2.99 a share.

Chief executive Ronald Williams told analysts in a conference call that the company expects between 550,000 and 600,000 new members in the first quarter of 2008, which would double the growth of 300,000 that previously was projected.

For 2008, Aetna expects between 800,000 and 850,000 new members in its medical insurance, more than the 650,000 that had been projected. Joseph M. Zubretsky, chief financial officer, said Aetna tempered its membership outlook for the year beyond the first quarter. "We think our guidance for '08 contemplates a slowing economy," he said in an interview.

Dave Shove, an analyst at BMO Capital Markets in New York, said Aetna performed well. "This was a difficult economy, and here you have a company that's growing its earnings well into double digits," he said. "To achieve that, I think, is pretty good."

Still, Aetna did not raise its earnings guidance.

About 75 people, chanting and carrying placards, protested outside Aetna's Hartford headquarters about the company's $1.8 billion of 2007 profit at a time when so many people have inadequate or no health insurance.

The protesters chanted: "Aetna, Aetna, we won't let ya, make your bucks while health care sucks." Some of the activists wore open-backed hospital gowns and fake buttocks to dramatize how people don't have enough coverage and "are being left behind," said Jon Green, executive director of Connecticut Working Families.

Courant Staff Writer Diane Levick contributed to this story.

[ Top of This Page ]

Aetna Glitch Affects Seniors

Some Receive Bill Meant For Another

By Diane Levick, Hartford Courant
January 30, 2008

A glitch at Aetna has left thousands of senior citizens around the nation, including 505 in Connecticut, with some other Aetna member's premium bill for prescription drug insurance. The Hartford-based insurer, which discovered the problem Monday, said the bills don't contain Social Security numbers or medical, Medicare, claim, or bank or credit account information.

Fred Laberge, an Aetna spokesman, said the company expects to mail correct bills and apologies today to affected members. "We are embarrassed by the inconvenience this caused to our members and are taking quick action to alert them," Laberge said.

Aetna would not disclose exactly how many seniors on its Medicare drug plans were affected nationwide. The company said that about 18 percent of those in a "limited mailing" from Jan. 22 to 24 received misdirected premium invoices.

The company's apology will come none too soon for Diane Daniel in North Carolina, who receives and handles bills for her ailing mother in Florida. When Daniel got the Aetna bill Monday addressed to her mother, but meant for someone else, she called the company and asked the customer service representative whether an apology would be issued. She says the representative said no. Daniel said she was taken aback by "her whole callous approach that this is no big deal."

Laberge declined to comment on Daniel's experience, but said, "We take our responsibility to safeguard member information very seriously."

In addition to sending a letter of apology and the correct invoice to members, Aetna is posting a recording on a toll-free line to explain the error and the steps being taken. Each incorrectly mailed bill contained a name, address and eight-digit member identification number of another member.

"We are reviewing how the system malfunctioned, and we are assessing options, including more extensive quality control measures, to avoid future problems," Laberge said.

Aetna's system was set up to print each premium bill on one page, front and back. When the printing of one bill ran beyond one page, it affected the next bill and created a chain reaction.

Laberge said the problem was not large enough in scope to require reporting it to regulators.

[ Top of This Page ]

Battling Over Payments

Patients Caught In Aetna-AMA Out-Of-Network Fight

By Diane Levick, Hartford Courant
January 11, 2008

Aetna and the American Medical Association are fighting about payments to doctors again, and patients across the nation are getting caught in between. The dispute centers on how much Aetna pays out-of-network doctors in some instances and the right of those doctors to bill HMO members for charges the insurer doesn't pay.

Millions of dollars are at stake, and physicians say Aetna is violating a provision of its 2003 nationwide settlement with doctors, which ended massive litigation over claim payment denials and delays. Aetna says it's trying to protect members from high charges.

The issue is who pays what when Aetna HMO members end up getting care from physicians who aren't part of the insurer's network because there was no opportunity to choose an in-network doctor. That often happens in emergencies and with hospital-based surgery or other care where patients aren't in a position to pick in-network anesthesiologists or other doctors to take care of them. In those instances, Aetna HMOs, as of June 1, 2007, are reimbursing out-of-network providers 125 percent of what Medicare would have paid for the same services. A different formula is required in New Jersey. The 125 percent of Medicare, however, is less than what many doctors charge, and they often bill patients for the balance that insurance doesn't pay.

Aetna, however, is telling HMO members who involuntarily got out-of-network care that they're not liable for the balance billed by the physicians. Aetna sends an "explanation of benefits" showing what it paid the doctor, and a letter telling members that if the doctor bills them for the balance, to send the bill to Aetna. Aetna says it will try to resolve the situation itself with the out-of-network physician, and may end up making additional payments to some doctors. It isn't clear how much money consumers will still be on the hook for.

"Our goal is to keep patients out of this," said Aetna spokeswoman Susan G. Millerick. But some patients are in the thick of it, confused and refusing to pay the doctors. "There has been a lot of bad blood between patients and physicians" because of Aetna's actions, said Dr. Alan Schorr, an endocrinologist in Langhorne, Pa. "It has put us in an adversarial position." Schorr, who believes he's owed nearly $10,000 from the balance-billing fallout, doesn't contract with HMOs or PPOs, and is the only endocrinologist at the local hospital.

The American Medical Association (AMA) is denouncing Aetna's policy, which doesn't apply to PPO, or preferred provider, health plans. "This policy fails to recognize each physician has different practice costs as reflected by their billed charges," AMA Chief Executive Dr. Michael D. Maves said in a recent letter to Aetna Chief Medical Officer Dr. Troyen A. Brennan. "It is simply arbitrary and capricious for Aetna to deem 125 percent of Medicare to be a fair payment across the board." The two men are scheduled to meet to discuss the issues in early February.

The AMA believes Aetna is breaching the 2003 settlement by failing to state on explanation-of-benefits forms to HMO members that out-of-network doctors have a right to balance-bill them. "We think that's a fairly clear violation of the settlement," said Cameron Staples, compliance dispute facilitator for the Aetna settlement. He says he's gotten eight or nine complaints from doctors — none from Connecticut — stemming from the balance-billing issue. "Patients are getting caught in the middle," added Staples, a lawyer and also a Connecticut state representative.

Aetna says that in instances where HMO members had no choice in getting out-of-network doctors, the company is treating the care as if it were in-network. That's because in-network doctors aren't allowed to balance-bill HMO members.

[ Top of This Page ]

Methods Used by Insurers Are Questioned

By Robert Pear , The New York Times
May 6, 2007

WASHINGTON — Insurance companies have used improper hard-sell tactics to persuade Medicare recipients to sign up for private health plans that cost the government far more than the traditional Medicare program, federal and state officials and consumer advocates say.

Erik S. Lesser for The New York Times

Bobbie S. Whatley of Columbus, Ga., said a young man who showed up on her doorstep in November and talked to her about insurance forged her signature, and a month later she received mail thanking her for joining a plan. “It turned into a nightmare,” Mrs. Whatley said.

Tracking Growth Enlarge

Tracking Growth Insurance agents, spurred in some cases by incentives like trips to Las Vegas, have aggressively marketed the private plans, known as Medicare Advantage plans. Enrollment in them has skyrocketed in the last year, and Medicare officials foresee continued rapid growth in the next decade.

In Mississippi, George R. Dale, the state insurance commissioner, said, “Abusive Medicare insurance sales practices are spreading rapidly throughout the state.” State Senator Terry C. Burton, a Republican, said, “My office is receiving calls daily from seniors who have been victims of unscrupulous salespeople.”

Proponents of private plans say they are indisputably good for many older Americans because they coordinate care and may offer extra benefits, like discounts on eyeglasses, hearing aids and dental care.

But federal officials said that the fastest-growing type of Medicare Advantage plan generally does not coordinate care, does not save money for Medicare and has been at the center of marketing abuses.

These “private fee-for-service plans” allow patients to go to any doctor or hospital that will provide care on terms set by the insurer. In most cases, no one manages the care. And some patients have found that they have less access to care, because their doctors refuse to take patients in private fee-for-service plans.

Moreover, those plans may be more expensive than traditional Medicare for some patients, because the co-payments for some services may be higher. The Medicare Payment Advisory Commission says that the cost to the government is also higher because it pays the private fee-for-service plans, on average, 19 percent more than the cost of traditional Medicare.

Richard S. Foster, chief actuary for the Medicare program, said “the additional payments to Medicare Advantage plans, above and beyond the costs” of traditional Medicare, were causing higher premiums for all beneficiaries and speeding the depletion of the Hospital Insurance Trust Fund for Medicare.

Almost one-fifth of the 43 million Medicare beneficiaries are now in some type of private plan.

Much of the growth in private fee-for-service plans has come in rural areas, where doctors and hospitals are often in short supply.

In Georgia, two insurance agents were arrested last month and accused of conspiring to defraud Medicare beneficiaries.

“The agents signed up unwilling consumers and even deceased individuals for private Medicare plans,” said John W. Oxendine, the Georgia insurance commissioner. “This appears to be a national problem, based on my conversations with insurance officials around the country.”

In an interview, Bobbie S. Whatley of Columbus, Ga., a 69-year-old nurse practitioner, said that a young man wearing a blue denim shirt with a WellCare logo showed up on her doorstep in November and talked to her about her insurance.

Mrs. Whatley did not sign up, she said, but he “forged my signature,” and a month later she received mail thanking her for joining one of WellCare’s private fee-for-service plans.

“It turned into a nightmare,” she said. “I spent two months trying to cancel my enrollment. I have all my mental faculties. If I let somebody like this come into my home and take advantage of me, then I am really concerned about older people who are more debilitated and not able to take care of themselves.”

John N. Aberg, a spokesman for WellCare, said the company had terminated contracts with 10 independent sales agents who had engaged in door-to-door solicitation and other prohibited marketing practices in Georgia and several other states.

“We have zero tolerance for any behavior that violates marketing guidelines,” Mr. Aberg said.

The Louisiana insurance commissioner, James J. Donelon, said some agents were using “overly aggressive sales tactics,” including false promises, “to market Medicare-related products with little or no concern for the needs of the consumer.”

James E. Long, the insurance commissioner in North Carolina, is investigating complaints that insurance agents switched residents of an assisted living community from traditional Medicare into private plans without their permission. Officials in Kansas, Oklahoma and Wisconsin said they were investigating similar complaints.

Insurers sell private fee-for-service plans as a replacement for traditional Medicare and for Medicare supplement policies, known as Medigap insurance.

But Dr. Barbara L. McAneny, a cancer specialist in Albuquerque, said that many of her patients who signed up for such plans “suddenly found that they had huge new co-payments — $1,250 every three weeks for a combination of five intravenous chemotherapy drugs.”

In Florida and seven other states, the Universal Health Care Insurance Company offers a private fee-for-service plan that promises “the ultimate freedom to see any doctor, any time, anywhere.” This product — the Any, Any, Any plan — got off to a fast start, enrolling 85,000 people. But it “temporarily postponed new enrollments as of Feb. 14” because of a dispute with the Florida insurance commissioner, Kevin M. McCarty, who said the company did not have adequate cash reserves to comply with state law.

Tracking Growth Robert M. O’Malley, a spokesman for Universal, said, “Our plan was much more popular than we expected.”

Coventry Health Care offered a three-night trip to Las Vegas as a reward for agents who generated the most applications for its private fee-for-service plans. By the end of January, enrollment “had already exceeded our initial expectations for the entire year,” Coventry said. The company, which trains agents in the “dos and don’ts of marketing,” said it had “an excellent track record” of compliance.

Insurers frequently offer cash bonuses, trips and other financial incentives for agents to increase sales in the Medicare market.

From December 2005 to April of this year, total enrollment in private plans increased 39 percent, to more than 8.5 million. Private fee-for-service plans accounted for more than half of the growth. Their membership rose to 1.5 million, from 209,000 at the end of 2005.

In a letter inviting insurance companies to participate in Medicare next year, the Bush administration expressed alarm about the marketing of some private plans. It said that beneficiaries and even doctors were often confused about them.

“Providers and people with Medicare do not clearly understand this product,” said Abby L. Block, the Medicare official who supervises private plans.

Leslie V. Norwalk, acting administrator of the Centers for Medicare and Medicaid Services, said her agency had visited WellCare’s corporate headquarters in Florida and conveyed “strong concerns” about the company’s behavior.

“WellCare was informed that its efforts thus far to address marketing issues were inadequate and unacceptable,” Ms. Norwalk said. She vowed to step up supervision of private plans.

David A. Lipschutz, a lawyer at California Health Advocates, a nonprofit group, said that insurance agents working for WellCare had made unscheduled visits to a subsidized housing complex in the San Francisco area and signed up elderly Chinese-Americans with limited ability to speak English. After being enrolled in one of WellCare’s private fee-for-service plans, he said, some of the low-income patients discovered that their doctors did not accept the plan.

The private fee-for-service plan is like a privately administered version of traditional Medicare. Congress authorized such plans in 1997 at the urging of the insurance industry, rural lawmakers and the National Right to Life Committee, which opposes not only abortion, but also euthanasia and the rationing of care for older people.

Brock A. Slabach, administrator of the Field Memorial Community Hospital in rural Centreville, Miss., said that private fee-for-service plans were causing havoc at his 25-bed hospital.

“People are signing up for programs they don’t understand,” Mr. Slabach said. “Agents for a private fee-for-service plan set up tables in front of a grocery store or a drugstore here. Seniors think they are signing up to get drug coverage or just to get more information. The next thing they know, when they show up at our hospital, they are in that company’s plan.”

Private plans generally provide all the services of traditional Medicare, and many offer extra benefits, but the co-payments may be different. Thus, Mr. Slabach said, under traditional Medicare, a beneficiary does not have any co-payment for the first 20 days in a skilled nursing home, but some private fee-for-service plans charge $100 a day, and that charge comes as a shock to some patients.

Kelly E. Van Sickle, director of managed care at Catawba Valley Medical Center in Hickory, N.C., said, “Private fee-for-service plans have flooded our market and created significant confusion for our senior population.”

Michael Hagen, chief executive of Riverwood Healthcare Center, which runs a small hospital and three clinics in rural Aitkin, Minn., reported a similar experience.

“Patients buying these private fee-for-service plans are not sure exactly what they have bought,” Mr. Hagen said. “They go to a meeting sponsored by an insurance company. They hear a salesman. Sometimes the salesmen do not understand the nuances of the products they are selling. They do not realize that the beneficiary’s co-payments may be higher than in traditional Medicare.”

[ Top of This Page ]

Bill to Let Medicare Negotiate Drug Prices Is Blocked

By Robert Pear, New York Times
April 18, 2007

WASHINGTON — A pillar of the Democratic political program tumbled today when Republicans in the Senate blocked a proposal to allow Medicare to negotiate lower drug prices for millions of older Americans, a practice now forbidden by law.

Democrats could not muster the 60 votes needed to take up the legislation in the face of staunch opposition from Republicans, who said that private insurers and their agents, known as pharmacy benefit managers, were already negotiating large discounts for Medicare beneficiaries.

Fifty-five senators, including 6 Republicans, supported a Democratic motion to limit debate and proceed to consideration of the bill, while 42 senators voted against it. Such motions require a three-fifths majority under Senate rules. Without a limit on debate, opponents can prevent legislation from ever coming to a vote.

The Senate had only a brief debate on the merits of the legislation, which is a high priority for the new Democratic majority in Congress.

Republicans framed the issue as a choice between government-run health care and a benefit managed by the private sector. The drug benefit is delivered and administered by private insurers, under contract to Medicare.

Senator John Cornyn, Republican of Texas, denounced the bill as “a step down the road to a single-payer, government-run health care system.”

Democrats said they were merely trying to untie the hands of the secretary of health and human services, so he could negotiate on behalf of 43 million Medicare beneficiaries.

“The Department of Veterans Affairs is able to negotiate for lower-priced drugs,” said the Senate majority leader, Harry Reid, Democrat of Nevada. “H.M.O.’s can negotiate. Wal-Mart can negotiate. Why in the world shouldn’t Medicare be able to do that?”

The 2003 Medicare law prohibits Medicare from negotiating drug prices, setting prices or establishing a uniform list of covered drugs, known as a formulary.

Mr. Reid said the Democrats fell short today because of “the power of the insurance industry and the pharmaceutical industry” and their close ties to Republicans in Congress.

But the vote also reflected ineffectual advocacy by Democrats, who were slow in responding to criticism from knowledgeable, well-prepared Republican senators like Charles E. Grassley of Iowa.

“Private competition works,” said Mr. Grassley, a principal author of the 2003 Medicare law. “The government has very little experience and a dismal track record figuring out what to pay for drugs.”

Big companies that offer the Medicare drug benefit, like Caremark and Medco Health Solutions, “have more market power than Medicare” because they negotiate for tens of millions of people in private health plans, as well as for Medicare recipients, Mr. Grassley said.

The House passed a bill requiring the Secretary of Health and Human Services to negotiate drug prices by a vote of 255 to 170 on Jan. 12, just eight days after the new Congress convened. The Senate bill would permit but not require such negotiations.

President Bush had threatened to veto either or both versions of the legislation.

Neither the House bill nor the Senate bill gives much guidance to Medicare officials on how to negotiate.

In creating the drug benefit in 2003, Congress made a radical departure from traditional Medicare, which offers uniform benefits defined by law. Medicare recipients in every state now have a choice of prescription drugs plans with different benefits, premiums, co-payments and deductibles.

The 2003 law prohibited the government from interfering in negotiations between drug manufacturers and private companies that provide the Medicare drug benefit. The House and Senate bills would repeal this ban.

Employers and health plans typically get discounts on particular drugs in return for encouraging patients to use those medicines, rather than competing products.

The Congressional Budget office said that the Senate bill, like the House measure, “would have a negligible effect on federal spending.”

“Without the authority to establish a formulary or other tools to reduce drug prices, we believe that the secretary would not obtain significant discounts from drug manufacturers across a broad range of drugs,” the budget office said.

The Republican senators who joined Democrats in voting to take up the drug price negotiation bill were Norm Coleman of Minnesota, Susan Collins of Maine, Chuck Hagel of Nebraska, Gordon H. Smith of Oregon, Olympia J. Snowe of Maine and Arlen Specter of Pennsylvania.

Some Republicans were prepared to filibuster the Senate bill, but that proved unnecessary.

The Senate Republican whip, Trent Lott of Mississippi, said Republicans had blocked consideration of the bill because they did not want to dicker with Democrats over amendments on unrelated issues, “with no happy end in sight.”

But Senator Ron Wyden, Democrat of Oregon, predicted that the Senate would vote again on the issue, perhaps on an amendment to a spending bill or other legislation.

“The fight will go on,” Mr. Wyden said.

[ Top of This Page ]

Pension Pinch? Not For CEOs

Obligations soar as top executives' plans are beefed up

By Ellen E. Schultz and Theo Francis, Wall Street Journal
June 24, 2006

To help explain its deep slump, General Motors Corp. often cites "legacy costs," including pensions for its giant U.S. work force. In its latest annual report, GM wrote, "Our extensive pension and (post-employment) obligations to retirees are a competitive disadvantage for us." Early this year, GM announced it was ending pensions for 42,000 workers.

But there's a twist to the automaker's pension situation: The pension plans for its rank-and-file U.S. workers are overstuffed with cash, containing about $9 billion more than is needed to meet their obligations for years to come.

Another of GM's pension programs, however, saddles the company with a liability of $1.4 billion. These pensions are for its executives.

This is the pension squeeze companies aren't talking about: Even as many reduce, freeze or eliminate pensions for workers, their executives are building up ever-bigger pensions, causing the companies' financial obligations for them to balloon.

Companies disclose little about any of this. But a Wall Street Journal analysis of corporate filings reveals that executive benefits are playing a large and hidden role in the declining health of America's pensions. Among the findings:

Boosted by surging pay and rich formulas, executive pension obligations exceed $1 billion at some companies. Besides GM, they include General Electric Co. (a $3.5 billion liability); AT&T Inc. ($1.8 billion); Exxon Mobil Corp. and International Business Machines Corp. (about $1.3 billion each); and Bank of America Corp. and Pfizer Inc. (about $1.1 billion apiece). Benefits for executives now account for a significant share of pension obligations in the U.S., an average of 8% at the companies above. Sometimes a company's obligation for a single executive's pension approaches $100 million. These liabilities are largely hidden, because corporations don't distinguish them from overall pension obligations in their federal financial filings. As a result, the savings that companies make by curtailing pensions for regular retirees - which have totaled billions of dollars in recent years - can mask a rising cost of benefits for executives. Executive pensions, even when they won't be paid till years from now, drag down earnings today. And they do so in a way that's disproportionate to their size, because they aren't funded with dedicated assets.

One reason executive pensions have grown so large is that they are linked to ballooning overall executive compensation. Companies often design retirement payouts to replace a percentage of what a person earns while active.

But for executives, the percentage of pay replaced is itself higher. Compensation committees often aim for a pension that replaces 60% to 100% of a top executive's compensation. It's 20% to 35% for lower-level employees.

David Dorman was chief executive of AT&T Corp. from 2002 until its merger with SBC Communications in November. He left in January. His total of five years at AT&T earned him a yearly pension of $2.1 million. That will replace 60% of his annual salary and bonus in his final three years.

By contrast, former AT&T accountant Ralph Colotti's $28,800 annual pension replaces 33% of his final pay. He was at the company for 33 years.

Colotti's pension was held down by a change AT&T made in 1998 in the formula used to calculate pensions. The switch had the effect of freezing pension growth for older workers like him. The 55-year-old now works at another company with a pension plan. "Working here another 10 years won't make up for what my old pension would have been" without AT&T's change in formula, he said.

'Reasonable' deal

AT&T described its retirement benefits as excellent and said a pension on the scale of Colotti's is good in the telecommunications industry. Dorman's richer deal is "reasonable, customary and comparable to what similarly sized companies offer," AT&T said. A spokeswoman noted that "in any industry, senior executives are almost always provided with enhanced levels of benefits as a way to recruit and retain the best talent and the best leadership possible to lead the company."

In percentage of pay replaced, Pfizer's chairman and CEO, Henry McKinnell, does best of all. His future $6.5 million-a-year pension will replace 100% of his current salary and bonus.

Even as executives' pensions grow, many companies are curtailing those for the rank and file. In one move, hundreds of employers, including Boeing Co., Xerox Corp. and Electronic Data Systems Corp., have switched to pension formulas known as "cash balance" plans. One effect is to slow the growth of older workers' pensions or halt it altogether.

Other companies, including Verizon Communications Inc. and Sears Holdings Corp., are freezing their pension plans for some workers. A freeze leaves intact pensions already earned but prevents any further growth during a worker's career.

Some employers have added pensions for executives at about the same time as they limited those for others.

Allied Waste Industries Inc. froze pensions for certain salaried workers in 1999. Among those affected was Brad Green, then a safety official at a business Allied Waste had acquired. Although he never expected his pension to be big, Green, 45, said the freeze meant any future growth "was basically just wiped out with the stroke of a pen."

Four years later, Allied adopted a pension plan that covers 10 executives. It did so "to provide a competitive recruitment and retention benefit," said Allied's treasurer, Michael Burnett. He noted that the plan that was frozen had come from a company Allied acquired.

Burnett added that all employees have a 401(k), a savings plan to which they can contribute from their own earnings. Many companies, including Allied, match part of employee contributions.

The 401(k) strategy

Companies that restrict regular pension plans often point to the 401(k), some noting that they've enhanced their match of contributions. Unlike pension plans, 401(k) plans don't create a corporate debt or liability, since employees provide most of the assets and firms are typically free to halt any contributions of their own.

Companies generally are also free to alter, freeze or end regular employees' pension plans, unless a union contract is involved. But executive pensions often are protected from management interference by employment or other contracts.

By curtailing pensions for regular workers, large companies have reduced pension obligations to them by billions of dollars in recent years. So pension obligations to regular workers are stable or shrinking at many companies while those for executives rise. At BellSouth Corp., for example, the obligations for pensions for ordinary workers have edged down 3% since 2000. The liability for pensions for executives is up 89% over the same period.

The promise of any pension becomes a corporate obligation. Although the payments are in the future, the promise means the company has a liability now. And a number can be put on it.

Pfizer's promise to pay McKinnell $6.5 million a year for life in retirement equals an $83 million liability for Pfizer today, federal filings by the drug-maker show. Pfizer defends McKinnell's pension as fair.

When Edward Whitacre, chairman and CEO of AT&T Inc., turns 65 in November, he'll be entitled to a pension of $5.4 million a year for life, plus an $18.8 million lump sum. For this, AT&T's liability today is $84.4 million, according to an actuarial estimate done for The Wall Street Journal by Katt & Co. of Mattawan, Mich. AT&T said Mr. Whitacre's pension reflects four decades of service and 15 years of "very, very strong and visionary management" as chief of the company, which was called SBC much of that time.

UnitedHealth Group Inc. Chairman and CEO William McGuire will get a $5.1 million annual pension after he retires, plus a further $6.4 million at retirement. The result is a UnitedHealth liability of about $90 million, according to two actuaries. UnitedHealth declined to comment on their estimate.

Companies sometimes offer several tiers of pensions for the highly paid. The structure at IBM illustrates this.

Its chairman and CEO, Samuel Palmisano, is due a yearly pension of about $4.7 million in retirement after age 60. He's now 54. IBM's liability today for this is about $50.3 million, according to an estimate by Katt & Co.

Another IBM pension plan, which last year covered eligible executives earning $351,000 or more, had a $204 million liability at year-end, company filings show. And for a third plan covering a broader group of the well-paid, IBM had obligations totaling $1.1 billion. IBM declined to say how many are covered by these plans, saying only that it is "thousands."

Shifting liabilities

To put the figures in perspective: The liability for IBM's regular U.S. pension plan, covering 254,000 workers and retirees, was $46.4 billion at the end of 2005. IBM no longer provides pension coverage for new hires.

An IBM spokesman described the estimate of its liability for Palmisano's pension as high but declined to provide another figure. He said Palmisano's pension from 32 years at the company will replace about 45% of his compensation, which the spokesman called below average for heads of major companies.

A result of these trends is that executive pensions make up a significant portion of total pension liabilities at many companies: 12% at Exxon Mobil and Pfizer; 9% at Metlife Inc. and Bank of America; 19% at Federated Department Stores Inc.; 58% at insurer Aflac Inc.

Companies' retirement liabilities for their executives have also grown through another little-noticed trend: Over recent years, an increasing portion of executives' pay has been postponed, via pension and deferred-compensation plans, rather than given in current paychecks.

Even if a company's liability for executives' pensions totals hundreds of millions of dollars, its employees and shareholders may never know. Companies don't have to report this obligation separately in federal financial filings. A few specify it in a footnote, and some provide clues that make it possible to derive the figure.

Perhaps the most significant effect of the limited disclosure is to make it difficult, or impossible, to evaluate company statements about their retirement burdens and the need to cut benefits. To see this, it's necessary to understand a bit about how pensions are accounted for.

Pension plans, whether for executives or for others, are obligations to pay. In other words, they're debts. And like any debt, they have what amounts to a carrying cost. That carrying cost is part of a company's pension expense.

In the case of pensions for regular employees, the expense is partly or wholly offset by investment returns on money the company set aside in the pension plan when it "funded" it.

Executive pension plans are different. For tax reasons, they're normally left unfunded. They have no assets set aside in them. That means there is no investment income to blunt the expense. The result is that obligations for executive pensions create far more expense for an employer, dollar-for-dollar, than pensions for regular workers.

Bigger expense

In Pfizer's overall U.S. pension obligation of about $9 billion, executive pensions account for about one dollar in eight. Yet the pension expense they generate is proportionately far larger - equal to more than half as much as that from pensions for regular employees and retirees, who are much more numerous. The executive plans cover 4,200 people. The regular plans cover more than 100,000.

When General Motors cites retiree costs, the giant automaker has a point: It owed nearly 700,000 U.S. workers and retirees pensions that totaled $87.8 billion at the end of last year.

But $95.3 billion had already been set aside to pay those benefits when due.

All of these assets are earning investment returns, which offset the pensions' expense. GM lost $10.6 billion in 2005. But deep as its losses have been, they would have been far worse without the more than $10 billion per year in investment income that the GM pension plan for the rank and file generates.

The pension plan for GM executives is another matter. Unfunded to the tune of $1.4 billion, it detracts from GM's bottom line each year.

Earlier this year, GM announced it would freeze the pensions of its 42,000 salaried workers starting next January, as well as of those 5,200 highly paid employees. The freeze of the executive pensions will cut GM's pension liability by $60 million, while its freeze of salaried workers will yield a far bigger reduction, $1.6 billion.

A spokeswoman for GM said its concerns about its pension plans have eased, though the company remains concerned about retiree health-care costs. With the pension freeze and improved returns on its pension assets, including billions of dollars GM has contributed to the plans in recent years, "I would say pension really is not a problem anymore," the spokeswoman said. She said that GM has no fixed obligation to pay the executive benefits and could renege at any time, although she called such a move unlikely.

GM has often said its U.S. pension plans added about $800 to the cost of each car made in the U.S. in 2004. It declines to say how much was due to executive pensions.

[ Top of This Page ]

Bogle: Capitalism Has Suffered 'Pathological Mutation'

By Russ Juskalian, Special for USA TODAY

When John Bogle, a 50-year veteran in financial services, says capitalism is in trouble, there is only one proper reaction: You listen. First, Bogle's qualifications: He founded the first index fund in 1975 (Vanguard 500 Index Fund). In 1999, Fortune named him one of the four investment "Giants of the 20th Century," and in 2004, Time magazine called him one of the world's 100 most influential and powerful people. A lifelong businessman (and Republican, he likes to add), Bogle is nothing if not the champion of idealistic capitalism.

In The Battle for the Soul of Capitalism (Yale University Press, 251 pages, $25), Bogle argues that our current system has undergone " 'a pathological mutation' from traditional owners' capitalism to a new form, managers' capitalism."

With power moving away from owners of securities, this new system has been led afoul by "grossly excessive executive compensation and stock options, part of an enormous transfer of wealth from public investors to the hands of business leaders, corporate insiders and financial intermediaries."

Remarkably well read and logical, Bogle is meticulous in supporting his thesis that our brand of capitalism is failing because of a shift of power away from owners. He quotes Edward Gibbon, Mark Twain, John Maynard Keynes, Warren Buffett, Oscar Wilde and others, with rigorous acuity  –  often assuming the reader is as well read.

The Battle for the Soul of Capitalism remains cogent, if at times in a rarified way. However, barring a familiar knowledge of corporate, mutual fund or investment terms and theories, reading this book is a feat in itself. Charts and math abound.

Bogle organizes the book into three main parts: Corporate America, Investment America and Mutual Fund America. Each part is broken into three divisions: what went wrong, how it went wrong and how to fix it.

All three areas of capitalism are failing because of similar causes, Bogle says. Executives are paid too much, speculation is triumphing over value and long-term growth as the primary influence in a stock's price, and managers make decisions in their own interests, not their clients' or shareholders' interests.

"In 1980, the compensation of the average chief executive officer was forty-two times that of the average worker; by 2004, the ratio had soared to 280 times that of the average worker (down from an astonishing 531 times at the peak in 2000)."

And in the matter of corporate scandal and fraud, it's not a case of a few "bad apples," Bogle writes, but of "a corporate barrel that itself is in need of considerable repair."

According to a USA TODAY/CNN/Gallup Poll (July 2002), which he references, only 25% of Americans trust corporate executives  –  barely more than used-car dealers. While managers and executives are partly to blame, shareholders must fess up to their responsibilities as owners. "The failure of Investment America to exercise its ownership rights over Corporate America has been the major factor in the pathological mutation" that capitalism is undergoing, he says.

Investors have turned away from the fundamentals of value, sustainability and growth, says Bogle, and hold securities for far shorter periods. Instead of buying for value and dividend payments over the long term, investors buy and sell on speculation alone  –  creating a damaging hollowness to the financial market itself, he warns. Investment America has become a "rent-a-stock" culture, as opposed to an "own-a-stock" culture.

This same plague has infected the mutual fund industry, which also suffers from an inefficient management problem Bogle calls "Corporate Incest" in homage to the title of "an early law review article about the industry's structure."

Nearly every mutual fund organization (besides Bogle's Vanguard) is run by an external management company, "with its own set of shareholders," that make all decisions regarding the mutual funds themselves: what fees to charge, who will manage the fund and what funds to create.

The trouble is that small fees, a few dollars per hundred dollars invested, add up over time the same way that compound interest can make a small investment huge.

So how does Bogle suppose we fix an industry  –  moreover, an economic paradigm  –  in which shareholders put up 100% of the cash, assume 100% of the risk and get only 25% of the returns? "The place to begin is with a federal government commission that works to resolve the problems of our intermediation society, and fosters the development of an investment society that gives owners a fair shake."

Bogle's ultimate prognosis is lifted from the title of shareholder activist Robert A.G. Monks' monograph: "Capitalism Without Owners Will Fail."

[ Top of This Page ]

Pension Funds Pin Target on CEO Pay

By Greg Farrell, USA TODAY

Runaway CEO pay, a longtime pet peeve of shareholder activists and corporate governance experts, is about to take center stage in Washington, D.C.

At least that's the hope of 10 pension funds from the USA, Canada and Europe. In a confidential letter sent to the Securities and Exchange Commission on Nov. 30, representatives of the funds, which together manage almost $1 trillion, urged the SEC to look more closely at the pay for performance among top executives.

SEC Chairman Christopher Cox said last month that the commission would develop a rule proposal early next year regarding executive compensation. Once the proposal is announced, most likely in January, the SEC will seek public comment.

In a copy of the confidential letter obtained by USA TODAY, the pension funds cited research showing that CEO pay at many companies in the Russell 3000 index (representing 99% of the U.S. stock market) bore no relation to how well those companies performed.

At 60 of the worst-performing companies in that group, which lost $769 billion in market value over the past five years, the aggregate pay for the top five executives of those 60 companies over the same period was $12 billion.

In other words, since January of 2000, some 300 executives who were responsible for more than three-quarters of a trillion dollars in shareholder value vanishing were rewarded by their shareholders with salary, bonuses and stock options worth $12 billion.

That averages out to $40 million for each of those companies' top five executives over the five-year period, or $8 million per executive per year.

"The system's broken," says Mark Van Clieaf, who compiled the data used in the pension funds' letter. Van Clieaf did not provide the letter to USA TODAY, but when asked about its contents, he confirmed the findings of his research.

His company, MVC Associates International, specializes in pay-for-performance issues. He stressed the point that CEOs at successful companies deserve everything they're paid. "We don't want to cap pay. We want to make sure that pay and performance are in alignment, which they're not today."

The letter to the SEC from the pension funds cites Honeywell as a company where during the last five years managers erased $4.3 billion in economic value  –  defined as net operating profit minus the total cost of capital used up  –  while the top five executives earned a total of $223 million for the period.

Executives at Time Warner destroyed $41.4 billion in economic value (and $59.8 billion in market value) while collecting $1.3 billion in pay.

Honeywell and Time Warner declined comment.

The funds that sent the letter include the California Public Employees' Retirement System, the California State Teachers' Retirement System, two New York state pension funds, the Ontario Teachers' Pension Plan and the State Board of Administration of Florida.

[ Top of This Page ]

Verizon Freezing Managers' Pensions

Firms Phase Out Plans

By Stephanie Armour, USA TODAY
Jan 1, 2005

Verizon Communications (VZ), the nation's second-largest telecom, said late Monday it was restructuring retirement benefits for 50,000 managers in a bid to save $3 billion over the next 10 years. Under the plan, managers will no longer earn pension benefits or receive service credits toward retiree health care benefits starting in July.

Verizon is acquiring MCI, and the combined company will also increase the 401(k) matching dollars for about 30,000 MCI managers who join the company after the deal closes.

As companies look to control costs, even financially healthy employers are freezing or cutting pension plans in a sign the time-honored retirement system is increasingly being chipped away.

Freezing Pensions

According to Watson Wyatt, 11% of Fortune 1,000 companies that have defined-benefit plans had a frozen or terminated plan in 2004. Nearly two-thirds of the Fortune 1,000 firms have a defined-benefit plan.

FROZEN/TERMINATED PLANS
Year	No. Frozen or Terminated	% of Sponsors With Such Plans
2001	34	5%
2002	39	6
2003	45	7
2004	71	11

Source: Watson Wyatt survey of Fortune 1,000 firms

The trend drew the attention of President Bush on Monday, who called on companies to protect workers' retirement benefits.

"My message to Corporate America is: You need to fulfill your promises," Bush said in a speech in North Carolina in which he called for tougher pension-reform legislation.

Hewlett-Packard this year announced that it's ending guaranteed pensions for new workers. Others altering plans include Sears, which says it will freeze pension benefits in 2006, and Motorola, which stopped offering pensions to new employees this year.

In 2004, 71 companies in the Fortune 1,000 that sponsored traditional pensions froze or terminated their plans, according to a study released earlier this year by Watson Wyatt Worldwide, a human resources consulting firm. That represents an increase from 45 companies in 2003 and 39 companies in 2002.

When companies freeze a plan, they keep it in place but halt future benefits that would have been earned. Terminating a plan involves closing it down. More companies are also not offering pension plans to new hires.

Driving the trend:

[ Top of This Page ]

'Broken' Pension System in 'Crying Need' of a Fix

By Marilyn Adams, USA TODAY

WASHINGTON - Most surviving American steelmakers long ago abandoned costly pensions plans. But AK Steel still covers most of its 7,500 workers with a plan that pays retirees a monthly benefit based on tenure and past wages  –  a coveted defined-benefit plan.

AK has never missed a benefit payment to a pensioner or a payment to fund the plan. That's a source of pride for the 105-year-old Middletown, Ohio, company. Nonetheless, the assets of the AK pension plan fall $1.3 billion short of meeting estimated future obligations. The plan's long-term survival isn't assured.

Much of the attention in the raging pension-reform debate in Congress and the executive branch focuses on big companies such as United Airlines and other corporate giants that have used Chapter 11 bankruptcy-court reorganization to dump defined-benefit pension plans on the already overburdened government insurer, the Pension Benefit Guaranty Corp. But it's also cases such as AK Steel  –  a relative corporate good guy that has seen assets fall short of liabilities even while the company follows the rules  –  that have reformers fearing a possible financial catastrophe on the scale of the savings-and-loan meltdown 15 years ago.

David Walker, chief of Congress' non-partisan Government Accountability Office, describes the pension system as "fundamentally broken." He's frustrated that policymakers so far have been unable to solve a problem that's been documented over and over. "There's a crying need," he says.

Business, Congress and the Bush administration agree that the U.S. system of private pensions is badly in need of fixing. What they haven't agreed on is how to fix it. Despite alarming statistics, years of studies and urgent calls for reform from advocates on all sides, Rep. John Boehner, R-Ohio, a sponsor of the pending House bill on pension reform, rates chances of passage by both houses of Congress this year as slim. Senate Majority Leader

Bill Frist, R-Tenn., said Monday that the Senate bill might reach that chamber's floor by next week. If Congress fails to act, "The problem will become much worse," says Bradley Belt, PBGC executive director. "To call upon taxpayers  –  most of whom don't have defined-benefit pensions  –  to pay for the benefits of those who do would be fundamentally unfair." In total, defined-benefit pension plans offered by private employers are underfunded by $450 billion, up from $39 billion just five years ago. The PBGC itself has a deficit of at least $23 billion. PBGC numbers coming out today are expected to paint an even bleaker picture: The high number of failed plans has left it without enough assets to cover future benefits. As more plans fail, the agency's deficit will grow. In recent years, Huffy bicycles, Big Bear supermarkets, Polaroid, Kaiser Aluminum, Bethlehem Steel, WestPoint Stevens, Archibald Candy and United Airlines have terminated their plans and transferred responsibility for them to the PBGC. What worries PBGC officials now is how many other large companies are out there with ailing plans covering tens of thousands of workers. The PBGC last year calculated that financially weak companies with a reasonable chance of terminating their pensions are $96 billion short of covering promised benefits.

GM a concern

The PBGC won't say whether General Motors, whose pension plan is the biggest in U.S. industry, is among them. But the PBGC estimates that if financially troubled GM had to terminate its plan soon, it would be underfunded by $31 billion, an estimate first reported by The New York Times. Using a different accounting method, Credit Suisse First Boston estimates the underfunding at $12.3 billion.

GM, whose plan covers 600,000 participants, disputes those figures but declined to provide its own estimate. It is not required by law to do so. "We don't think it's appropriate to view the pension plan on a termination basis," because GM has no plan to end it, said GM spokesman Jerry Dubrowski.

The U.S. Securities and Exchange Commission, meanwhile, is investigating how GM reports pension-plan liabilities in its financial statements as part of a broader look into the automaker's accounting.

PBGC director Belt fears the mounting pension crisis could approach the scope of the savings-and-loan debacle that pushed the Federal Savings and Loan Insurance Corp. into insolvency in 1989 and cost taxpayers $200 billion.

If the PBGC, which is supported by insurance-premium payments from pension-plan sponsors, were to sink too deeply into red ink, a giant taxpayer bailout might be the only way to keep millions of pensioners from losing their checks.

UNDERFUNDED COMPANIES
Companies with pension plans that are expected to be underfunded by at least 25% of their market capitalization, as of October 14
Company	2005 Est. Underfunded Amt.(bil.)	Est. Mkt. Cap.(bil.)	% Under- funded
Delta Air Lines	$5.8	$0.1	6,791%
Dehphi	4.6	0.3	1,712
Goodyear Tire & Rubber	3.1	2.5	125
Visteon	1.0	1.0	96
Ford Motor	13.5	16.0	85
General Motors	12.3	15.8	78
Unisys	1.2	2.0	58
Navistar International	1.0	1.9	51
Dana	0.4	1.0	47
Maytag	0.6	1.3	43
Hercules	0.4	1.3	28
Raytheon	4.1	16.5	25
Lockheed Martin	6.7	27.0	25

Stopgap pension relief for companies expires Dec. 31. Without comprehensive reform legislation this year, temporary rules will take effect that will increase the contributions companies must make to their plans as well as the insurance premiums they must pay the PBGC. U.S. Labor Secretary Elaine Chao says the price of doing nothing about reform will be "very bad" for plan sponsors.

The pension system in Corporate America is in trouble for many reasons, some within the control of Washington policymakers and some not. Not the least of the problems is Americans' lengthening life spans. Retirees are living longer than ever and will draw pension checks longer than ever. The biggest generation in history, the baby boom, starts hitting 65 in 2011.

Making things worse is that many pension plans let workers start drawing benefits after 30 years of work. For many retirees, that means benefits start in their 50s. Another factor: Pension funds rely on assets that grow through investments in stocks and bonds. For five years, markets have produced lackluster returns.

Loopholes in the law

But Congress can do nothing about demographics or investment returns. So reformers are focusing on loopholes in the law  –  and some companies' willingness to exploit them to avoid or reduce payments.

Private pensions are governed by the Employee Retirement Income Security Act, passed in 1974 after the collapse of automaker Studebaker a decade earlier, which left its retirees almost empty-handed. The law established the PBGC insurance program, which covers benefits up to specific annual dollar limits  –  up to $45,600 this year for someone retiring at 65  –  and requires companies to pay premiums. Over the years, changes have crept into the law designed to make it easier for firms to comply.

Among the issues that reform proposals address:

Most controversial is an administration proposal to penalize companies with poor credit ratings and underfunded plans by accelerating their plan payments. The thinking is that those companies are at higher risk for pension default and should be required to do more to keep plans afloat.

'Sky is not falling'

Boehner, the Ohio congressman, says such tough medicine would "kill the patient" and prompt some employers to drop their plans. AK Steel, for example, says its credit rating has been below investment grade for years, yet it has never missed a payment.

Business groups such as the National Association of Manufacturers acknowledged pension rules require tightening. But they question the administration's alarming projections and say companies with pension problems don't represent the majority.

"Our message is the pension sky is not falling," says NAM spokesman Darren McKinney. "The problem is not as big as some would have you believe." He says the PBGC's statistics show only 15% of private defined-benefit plans were funded below 70% in 2002, the latest data available.

What seems to gall reformers most is the recent pattern of big companies using Chapter 11 of the bankruptcy code to jettison the debt of underfunded pension plans, then exit bankruptcy and survive. US Airways did it, and United is in the process. Huffy and Big Bear did the same in bankruptcy court.

Now, reformers fear Delta Air Lines, Northwest Airlines and auto-parts maker Delphi, all of which filed Chapter 11 cases recently, will make the same argument to their bankruptcy-court judges.

"People are using the pension system and bankruptcy code as a business strategy," charges Walker of GAO.

AK Steel feels penalized

AK Steel agrees. It has seen plenty of competitors unload their plans. AK says its pension and retiree medical costs make its steel at least $40 a ton more costly to produce than some of its competitors'. "We are penalized because we didn't go bankrupt," says Vice President Alan McCoy.

So, AK has been going to its unions during contract talks, asking them to agree to freeze members' pension plans so benefits don't keep growing and so new employees aren't covered. Three unions, representing 20% of AK's unionized workforce, have agreed.

"They told us they needed that relief to stay competitive and stay out of bankruptcy," says Tim Imes, president of the United Steelworkers union in Ashland, Ky., that represents AK workers there. Given pension-plan terminations at Bethlehem Steel, National Steel and elsewhere, the union knew "the monster was real."

AK officials say they still believe in good pensions but can't ignore their competition. "We are disturbed that the bankruptcy system allows what has happened to happen," says McCoy. "We don't think that's right."

[ Top of This Page ]

Health Insurance Brings Dividends

Managed-Care Groups Produce Record Profits

By GUY BOULTON, Milwaukee Journal Sentinel
August 14, 2005

Stockholders are one group that can't complain about managed-care companies. While double-digit increases in the cost of health insurance have gotten most of the attention in recent years, investors in managed-care companies have been enjoying triple-digit returns.

The price increases  –  combined with consolidation, increased efficiency and better management  –  have produced record profits for managed-care companies.

"These companies have generated a huge return on capital," said Ivan Feinseth, director of research for Matrix USA, an institutional research and brokerage firm in New York.

The result has been stunning gains in the stocks of companies that sell health insurance and manage health plans.

The performance can be seen in the stocks of the three publicly traded managed-care companies with the largest market share in Wisconsin:

• UnitedHealth Group Inc., the parent of UnitedHealthcare, is up nearly fivefold since Aug. 1, 2000, increasing from $10.75 a share to close at $52.24 on Friday. In the past year, the stock is up about 63%.
• WellPoint Inc., the parent of Blue Cross Blue Shield of Wisconsin, is up roughly fourfold since it became a public company in October 2001, increasing from $18 a share to close at $72.74 Friday. In the past year, the stock is up about 80%.
• Humana Inc. is up roughly sixfold since Aug. 1, 2000, increasing from $7.25 a share to Friday's close of $45.65. In the past year, the stock is up more than 140%. These companies aren't the exceptions.

In the past five years, the Morgan Stanley Healthcare Payors Index, a composite of 12 managed-care companies, is up more than fourfold. In that time, the Standard & Poor's 500, a broad measure of the stock market, is down about 16%.

"Health care in general is a great business," said William Custer, director of the Center for Health Services Research at Georgia State University in Atlanta. "People are making a lot of money at it."

The question is whether the run will continue. And here, industry analysts are split.

Wall Street analysts, by a large majority, continue to recommend WellPoint and UnitedHealth, the two largest health insurers. And some analysts remain bullish on the sector. They see a promising market in enrolling Medicare beneficiaries in health maintenance organizations.

They also see the largest companies continuing to benefit from consolidation.

But others question whether the industry overall can continue to post impressive gains. For one thing, enrollment in commercial health plans is stagnant, as rising costs force more employers to drop health insurance as a benefit.

"Enrollment growth is what is going to be difficult for these companies on the commercial side," said Jackie Doeler, who oversees the health care portfolio for the State of Wisconsin Investment Board.

No one knows whether that will lead to price competition, Doeler said. And the outlook for the industry will depend partly on future premiums.

Managed care companies have been able to raise prices in recent years, she noted. "And therefore they have done quite well."

The rise in health care premiums is slowing. But the same goes for health care costs. The patents for several costly drugs have expired, for instance, and the same will happen to several others in the next few years.

Consolidation continues Consolidation also has contributed to the strong performance of managed-care stocks in recent years, Doeler said.

Administering health plans is a business, not unlike financial services, in which size can bring economies of scale.

Investments in technology, for instance, have helped managed-care companies lower administrative costs and increase profits.

"The people who are left have gotten pretty good at this," said Custer, who also is a professor of risk management and insurance at Georgia State. The industry's consolidation shows no signs of slowing.

Last month, UnitedHealth, based in a Minneapolis suburb, struck a deal to buy PacifiCare Health Systems Inc. for $8.1 billion in cash and stock.

In recent years, UnitedHealth has bought Oxford Health Plans Inc., Definity Health Corp. and Golden Rule. In Wisconsin, it bought Touchpoint Health Plan, a health maintenance organization, for $40 million last year. WellPoint, based in Indianapolis, was created when Anthem Inc. and WellPoint

Health Networks Inc. merged late last year. In Wisconsin, Anthem bought Cobalt Corp., the parent of Blue Cross Blue Shield of Wisconsin, in September 2003.

Humana, based in Louisville, Ky., has moved more gingerly. But its large presence in Wisconsin, where it employs about 3,300 people, stems partly from its acquisition of Emphesys Financial Group Inc. in 1995.

Consolidation has been the trend since managed care first began to take hold. And it's easy to forget that the personal computer has been around longer than many managed care companies.

Managed care didn't become widespread until the early 1990s. And the companies that entered the business were learning as they went along, experimenting with the type of plans they offer, the types of contracts they struck with hospitals and doctors, and the way they managed costs.

The results were often mixed. In its early days, managed care could be good way to lose money - and many of the companies did.

Nearly 60% of health maintenance organizations lost money in 1997, according to an overview done in 1999 by the Henry J. Kaiser Family Foundation, which does research on health policy. That started to change in the late 1990s.

"We've seen a maturing of the industry, in a sense," said Custer, of Georgia State.

With age comes growth The nascent market for Medicare HMOs, now called "Medicare Advantage," also could benefit managed care companies.

Many companies abandoned the business when rising health care costs outpaced what they were paid by the federal government. But the legislation that created a drug benefit for Medicare increased the fees paid to the companies. That's renewed interest in the market  –  one expected to grow as the population ages.

Managed-care companies also will administer the new Medicare prescription drug plans. That, too, could be a source of future profits  –  although the market could be chaotic in its early days.

Humana has a strong presence in Medicare HMOs. And the potential profit from Medicare HMOs partly accounts for the company's stock more than doubling in the past year.

Some analysts, though, question whether the market will be quite as profitable as expected.

"You don't know what the government is going to do with pricing, going forward," said Doeler, the portfolio manager for the state investment board.

Managed-care companies also see potential in so-called consumer directed health plans, which typically combine a high deductible with a type of savings account.

The plans have been a boost to the market for small businesses and individual health insurance. That's one of the strengths of Assurant Inc., with health insurance operations based in Milwaukee. Assurant Health writes individual and short-term health insurance and group health insurance to small-employer groups, primarily of two to 40 employees.

Assurant sells a variety of financial services and products. But its stock, too, has risen. Since being spun off by Fortis, a Belgian financial services company, in February of last year, Assurant stock has increased from $22 a share to $38.11 at Friday's close.

Consumer-directed plans have been touted as a way to slow the rise in health care costs. But Custer and others see the plans as little more than cost-shifting.

"All they are is less insurance," Custer said.

Health care costs continue to outpace inflation. And the impact of rising health care costs could be the biggest unknown in the long-term prospects of managed-care companies. There is no shortage of employers, hospitals, doctors, economists and managed-care executives who contend the health care system is broken. And Custer said that at some point the system will have to be restructured. That day, he added, is "not necessarily that far away."

Wall Street clearly doesn't see that risk. But Custer, a university professor and researcher, looks at the insurance industry's role in the health care system.

Analysts such as Feinseth, the research director of Matrix USA, look at return on capital and other financial yardsticks. And there the numbers speak for themselves.

"These companies," Feinseth said, "have been able to earn very good returns on capital."

Given the companies' performance over the past five years, so, too, have their stockholders.

gboulton@journalsentinel.com

[ Top of This Page ]

Health Costs Hit Workers Coming and Going

By Theresa Agovino, AP Business Writer

NEW YORK — Employees are facing a double whammy when it comes to health care costs: Many companies are likely to ask workers to pay more for their insurance, and rising health care costs mean companies may dole out lower raises.

Half of large U.S. companies said that increased health care costs have contributed to slower profit growth and as a result more than 75% may ask employees to bear an even greater share of the cost, according to a study by PricewaterhouseCoopers released Monday.

Twenty-five percent of the companies said double-digit health care cost increases may force them to lower raises for employees and one in five expects to slow hiring of permanent workers in the year ahead. The executives at the 150 companies surveyed said that per-employee health care costs had risen 12% over the last year and that they expect an 11% increase in the coming year if no changes are made to the plans.

While various indicators may point to improvement in the economy, health care costs are squeezing companies' ability to hire more workers and raise pay, said PricewaterhouseCoopers consultant Barry Barnett. Right now, he said 12% to 15% of company's payroll costs stem from health care, up from around 8% five years ago.

"Health care costs are the reason job growth isn't where the Bush administration would like it to be," Barnett said.

For example, in June the economy saw the addition of 146,000 jobs — less than the 195,000 jobs economists were predicting.

Barnett said that while the auto industry has been vocal about health care costs dragging on profits, the problem extends to many sectors with a large unionized workforce.

Employers seem conflicted over the best ways to reduce costs. Seventy percent said that requiring employees to pay higher deductibles would lead to a reduction of discretionary health care spending. But 60% said that would cause employees to defer seeking necessary care and risk long-term problems.

More than 80% of employers said they believe the most promising option for reducing health care cost increases was to provide financial incentives for employees to live a healthier life style. Still, only 48% of companies said that employees with unhealthy habits such as smoking should be responsible for paying a larger share of their benefits.

[ Top of This Page ]

Retirees Back at Work, With Flexibility

By Mindy Fetterman, USA TODAY

re-tire (ri-tîr') v.: 1. to go away, retreat, or withdraw ...

That might be Webster's definition, but as the first of America's 79 million baby boomers reach age 62 in 2008, they are going to change the meaning of the word.

	Doreen Bellino, who says she's 'not really retired-retired,' works one day a week.
By Jessica Rinaldi for USA TODAY

Boomers are likely to continue working, either part time or full time, as consultants or by setting up their own companies, surveys show. They want a "flexible" workplace that lets them take extended sabbaticals, then work intensely for shorter periods of time.

They want to "phase-in" retirement by working fewer hours as they near 65, or after. They might change careers, go back to school, volunteer. They're not quite sure yet.

They do know they don't want to keep working like dogs, as they've been doing. Yet, they don't want to hit the golf course full time, either.

"I work very hard, and would I like a few years off? Yes," says Ken Dychtwald, 55, a psychologist and gerontologist. "But would I love to never work again? No, that's not my dream. And it's not the dream of our generation."

In a 2001 survey of boomers, 80% said they were planning to work past 65, at least part time, according to AARP.

Many will do it because they have to; they need the money, AARP says. This generation has every expectation that they will live longer than the previous one. Yet, few have saved enough money for 30 years of full retirement.

But there's a second reason they have for wanting to keep working, according to the survey: "Desire to stay mentally active."

RESHAPING RETIREMENT
Major reasons for working in retirement
Need the money	61%
Desire to stay mentally active	54%
Need the health benefits	52%
Desire to stay physically active	49%
Desire to remain productive or useful	47%
Interest in phased retirement among current workers
Not at all interested	34%
Not too interested	28%
Somewhat interested	26%
Very interested	12%

Source: AARP "Attitudes of Individuals 50 and Older Toward Phased Retirement" March study

"Boomers are going to redefine what we think of as aging. We'll reject the term 'aging' or 'elderly,' " says Deborah Russell, AARP director of economic security. "Many boomers want less responsibility; they've done the management thing. They're looking for more meaningful work, to hone their skills, to still contribute  –  but to have flexible work options."

Going, then coming back

Doreen Bellino of Woburn, Mass., retired from Mitre, a government contractor, in 2001 when she was 58 years old.

But, "I'm not really retired-retired," she says. She's kind of retired.

When she left after 25 years in the human resources department, her bosses asked her to come back as a consultant. The company was starting a new database, and "since I had been in benefits so long, they needed someone with the memory of how things were done."

She came back for three days a week. Now, it's about one day. "Oh, it's fantastic," she says. "I'm a jewelry beader, it's a hobby. And I play a lot of golf."

Joyce Montgomery of Detroit retired from her job as a counselor at a children's home a couple of years ago when her husband, Johnny, retired.

"We traveled a little bit, but I got tired of sitting around," she says. "I wanted to come into the workplace to be around people."

She applied at CVS Pharmacy for part-time work. She was thinking 10, maybe 15 hours a week. Now, she works full time.

"They look at seniors like it's not a person who needs to work, so you can really depend on them" because they like their work more, Montgomery, 58, says of her new employer.

And she agrees. "It's not like my (old) job, where it was a bill-paying job. You had to go every day to keep the house together and raise your kids. That was a must. This is not."

Ronald Thompson of Palos Verdes Estates, Calif., spent nearly 40 years working for The Aerospace Corp., a non-profit company that supports the Defense Department's space program. He retired in July 2002. One month later, he was back.

He's part of a "casual retiree" program at the company and now works about 1,000 hours or half a year. "I thought I'd have been playing golf or fishing or doing some hiking now," he laughs.

But the firm's Milstar satellite communications program was near completion. He had been principal director when he retired. He wanted to see the project through.

Bellino, Montgomery and Thompson aren't boomers; they're a bit older.

But they're part of what Dychtwald, author of Age Power: How the 21st Century will be Ruled by the New Old, calls the "guinea pig generation." They're testing out phased-in retirement and phased-back-in working lives in advance of the big wave behind them.

"It's like in exploration; the scouts see it first. They may fall off the cliffs, but we're getting to see them experiment with retirement," he says. "We boomers have an advantage."

It wasn't until the 1960s that the American vision of retirement came to be the "golden years" of playing golf and sitting beachside, he says. The combination of a booming middle class after World War II, union-backed pensions and the growth of entitlement programs such as Social Security and Medicare led to a generation of financially sound seniors.

Before that, you essentially worked until you died.

"It's a relatively fascinating notion of the second half of the 20th century that retirement is a wonderful thing and that you are entitled to be happy, no matter how long you live," Dychtwald says.

Numbers worry employers

American business is facing a massive retirement of workers over coming decades without the padding of a big generation to fill their shoes. The number of workers ages 45 to 64 is going to jump 52% by 2010. But the number of workers ages 35 to 44  –  those in prime position to replace the boomers  –  will drop 10%, according the Bureau of Labor Statistics.

Demand is expected to far exceed the U.S. labor force as the mega-generation retires, according to the Employment Policy Foundation in Washington, D.C. "We've got a looming labor shortage, and I don't think we can get enough labor overseas," says Janemarie Mulvey, EPF chief economist.

In small but growing numbers, companies are beginning to offer programs to keep and lure older workers. Some have been doing it for years.

Monsanto has a Resource Re-entry Center with a database of retirees who want to work part time, full time or on special assignment. After a six-month retirement, they can join. The program, started in 1991, has 300 people in the database, with about 200 on assignment now at 12 Monsanto operations nationwide.

"We have (workers) in every area you can imagine, from very technical research to IT to sales to distribution to accounting to auditing," says Deb Lebryk, director of external relations for Monsanto, which is headquartered in Stamford, Conn. "We even have an individual who has considerable interest in travel who does audits across the world. She's been to Brazil, Argentina. She'll call us and say, 'I'm in Antwerp. Any work you want me to do?' "

Mitre offers phased-in retirement with fewer hours or fewer workdays and has a corps of "reserves at the ready"  –  retirees who'll come back to work on specific, short-term projects.

Mitre, with headquarters in Bedford, Mass., and McLean, Va., is a government contractor that manages federally funded research and development centers for the Department of Defense, the Federal Aviation Administration and the IRS. It started the retiree program in the early 1980s because it became concerned that it could lose too much institutional knowledge as its workforce retired.

"A lot of the work we do requires folks who have been there, done that," says Bill Albright, director of quality of work life and benefits. In fact, 40% to 50% of the hires the company makes each year are over age 40; the average age of employees is 47, and it "creeps up each year," he says.

The company also needs the expertise of people who have worked in industry or government. "We have to be able to get inside our clients, to understand their culture, their technology, their operating systems," Albright says.

The Aerospace Corp., based in El Segundo, Calif., is another government contractor that worries about continuity. It has 40 to 50 employees in its workforce of 3,500 who are over age 70, says Charlotte Lazar-Morrison, director of human resources. The Aerospace Corp. allows workers to "try out" retirement by taking a leave of absence and then returning to work. It also has the "casual retiree" program that Thompson is part of.

"With this contingent workforce, you can use it as you need it," says Lazar-Morrison. "It's a great surge mechanism for high-demand times."

CVS had a different problem. It realized in the early '90s that its workforce didn't reflect the U.S. population. It was too young, and turnover was too high. Only 7% of its workforce was over 50. "We want our stores to mirror the customer, so we needed to hire older people," says Stephen Wing, director of government programs for CVS, headquartered in Woonsocket, R.I.

It went on a campaign to hire and retain older workers. Now, 17% of the workforce of about 150,000 people is over 50. It gives workers flexibility on hours, days and the jobs they do. A pharmacist might become a pharmacy technician; the work is good, but less demanding. Or employees might move south part of the year, but still have a home in the North.

One woman in that position said she'd have to quit. "Well, we have stores in Florida and up north, I told her," says Wing. "She can transfer back and forth."

Companies, he says, are going to have to become more flexible if they want to get and keep the best employees.

That's the kind of talk baby boomers like.

[ Top of This Page ]

Letter to the Editor

Written to Newsday.com

May 26, 2005

In Marie Cocco's column "It's not just pensions that we are losing" [Opinion, May 17], regarding the horrible pension situation at United Airlines, she brings to light some of the many pressing problems facing American retirees.

Is it right that corporate executives can merely walk away from their obligations to millions of America's retirees only to see their businesses, stock prices and bonuses soar as a result? Is it right that Congress stands by and allows retirees who worked 30 or 40 years for their pensions and benefits, in lieu of wages, only to be stripped of those pensions and benefits when they really need them?

Sadly, in today's world, a lifetime of loyalty to a company no longer comes with the security it once did. Cocco rightfully ends the column with a call for public activism.

The Long Island-based Association of BellTel Retirees for the past nine years has been putting out a call to action to tens of thousands of retirees. We must remind companies that they cannot simply forget about or renege on their promises to provide workers and retirees with pensions and benefits in retirement. Those pensions and benefits were "earned" during a lifetime of work.

It is not just retirees, but the general public, that also must show its outrage to corporate America and our lawmakers. All taxpayers must get involved since, it is you and I who will be handed this pension debt from the executives who run United Airlines and its parent company, UAL Corp.

C. William Jones

Editor's note: The writer is president of the Association of BellTel Retirees.

Cold Spring Harbor

[ Top of This Page ]

Should you worry about your future pension benefits?

Pension planning

By Andrea Coombes, MarketWatch

SAN FRANCISCO  –  Today you imagine that tidy pension you've been counting on for years will be plenty to fund your retirement dreams.

But tomorrow you may wind up facing the same fate as 120,000 United Airlines workers, some looking at massive benefit cuts as the federal Pension Benefit Guarantee Corporation takes over their pensions.

Shielding you from that scenario is the ability of your employer to remain financially stable while fully funding its pension plan. But that's a balancing act an increasing number of companies are finding difficult to manage.

The number of pension plans turned over to the government rose to 192 last year, up from 155 in 2003, pushing the number of workers and retirees in such plans to 1.1 million, including United Airlines' (UALAQ: news, chart, profile) workers and retirees.

And the federal agency known as the PBGC, which takes over plans and insures benefits for the 44 million workers who still enjoy traditional pensions, expects to shoulder billions more in promised benefits from plan turnovers in the future.

That's not counting the some 1,200 financially stable companies that chose to close down their fully funded pension plans last year in an effort to move workers into less costly retirement savings plans, like 401(k)s.

Given the state of the pension world, workers currently basking in the thought of a hefty pension come retirement might want to think again.

"There's never a guarantee that the benefits will be continued in the future," said Alan Glickstein, a senior consultant with Watson Wyatt Worldwide, the consulting firm. "Pension plans in general don't have any kind of lifetime guarantee."

Combine the state of pensions with "the uncertainty about Social Security and medical benefits," he said, and "contributing to a 401(k) or an IRA should be an integral part of [anyone's] financial plan for retirement."

Workers at financially unstable companies should be extra wary because theirs are the plans most likely to be taken over by the government.

"Employees should understand the general financial condition of the organization they work for [and] they should understand the general financial condition of the pension plan they participate in," said Steve Kerstein, managing director of the global retirement business at Towers Perrin, a consulting firm.

While many workers receive the full amount of their promised benefits even after the PBGC takes over their pension, others experience a steep drop in payouts.

Workers' annual benefits are limited to about $45,000 a year under a PBGC-operated plan, and those who retire earlier than age 65 can also expect reduced benefits.

The current maximum benefit for a worker retiring at, say, age 60 is about $29,000 a year, said Jeffrey Speicher, a PBGC spokesman.

For retirees, the outlook is even less rosy given that they can face benefit cuts but have less time to make up the difference themselves.

One retired steelworker at Bethlehem Steel saw his benefits cut by two-thirds when the PBGC took over that company's plan. "It is not unheard of for participants to lose two-thirds of their promised monthly benefit," according to the agency's recent congressional testimony.

More plan terminations to come

Certainly, some U.S. companies are in need of a financial check-up.

In its annual report last year, the PBGC said company plans likely to need taking over  –  "probable terminations" in the agency's parlance  –  would require the agency pay $16.9 billion in benefits in years to come.

That $16.9 billion includes the $6.6 billion the PBGC will pay to United Airlines' workers and retirees, and $2.3 billion to U.S. Airways' (both companies' pension plans were already counted as probable terminations), but that still leaves about $8 billion in promised benefits the PBGC considers likely in need of rescue at some point soon.

Some are worried the PBGC itself is nearing its own financial brink. Taking the pensions of United Airlines and U.S. Airways (UAIRQ: news, chart, profile ) under its wing pushed the agency's deficit to a record $23 billion, the shortfall between promised benefits and incoming revenue.

That doesn't mean the agency is likely to fail any time soon  –  it has enough to pay benefits to current retirees in the plans it manages  –  but lawmakers are urging safeguards now, in part to prevent a future taxpayer bailout.

'Reasonably possible' plan failures

And the PBGC is concerned about even more pension bailouts.

Another $96 billion in benefit payouts is currently promised by company plans that the PBGC calls "reasonably possible" as takeovers, according to the agency's 2004 report. That's up from $82 billion in 2003 and $35 billion in 2002.

What puts a company's plan on the "reasonably possible" list?

Those are plans offered by companies whose credit quality is below investment grade, Speicher said.

"If you're working for a company that's below investment grade, you might want to inform yourself very well about the funded status of your pension plan," he said.

The PBGC doesn't say which companies are on that list, but it does offer industries.

Of those "reasonably possible" plan terminations, $48.4 billion in benefits is concentrated in manufacturing, followed by $30.5 billion in transportation, communication and utilities, according to the PBGC's financial report for fiscal year 2004.

Another $7.9 billion in benefits is promised by the services/other sector; $5.8 billion in wholesale and retail trade; $1.9 billion in agriculture, mining and construction; and about $1.2 billion in finance, insurance and real estate.

What to expect from the PBGC

If your plan's status worries you, figure out what you can expect from the PBGC in the worst-case scenario that your company terminates your plan.

"The easiest way to know whether they have a lot to worry about is ... [to ask] how much will my pension be?" said Dallas Salisbury, president of the Employee Benefit Research Institute.

The PBGC guarantees benefits up to a certain dollar amount. Workers who expect bigger pensions may be in for a shock should their company hand the plan over to the agency.

Still, "historically, over 90% of workers receive the full amount of their promised benefit," Speicher said.

But note: That's referring to benefits you've already accrued. Once the company hands your plan over to the PBGC, you're not accruing additional benefits.

Of the benefits you've already accrued, most workers will receive what they've been promised, up to the PBGC's annual income limit, currently a tad over $45,000 for workers who retire at age 65.

Your retirement age plays a part in what you can expect. Consider that retired steelworker: After working for 30 years at Bethlehem Steel, he retired at age 50 with a $3,600 per month pension.

Six months later, the PBGC took over the plan and, as required by law, cut those benefits to $1,200, the maximum guaranteed benefit at that time for a worker who retired at age 50, according to congressional testimony by the PBGC.

The maximum benefit amount changes annually, but the maximum that applies to you is the one in effect the year the plan was terminated, no matter what's in effect when you apply for benefits.

So a worker whose pension plan was taken over in 1985, when she was 45 years old, who then requests benefits in 2005, at age 65, is "subject to the 65-year-old limit for 1985," Speicher said.

Also, don't expect to enjoy any improved benefits offered by your company within five years of the plan's takeover. Instead, workers should expect the benefits they would have received under the plan as it existed five years earlier.

"If the plan improved any time in the last five years, the PBGC looks first to the plan that was in effect five years ago, and the plan improvements only get phased in later" if the plan's assets allow it, Kerstein said.

This rule will affect employees in several United Airlines' plans, Speicher said.

Plus, the PBGC does not guarantee supplemental benefits. For instance, in steel workers' plans, "there are agreements to provide bridge payments between the early retirement date and the date the worker is eligible for Social Security," Speicher said.

Under the rules governing the PBGC, "those are not considered pension benefits."

Andrea Coombes is a reporter for MarketWatch in San Francisco.

[ Top of This Page ]

Is there nobody we can trust?

Commentary: Betrayal of United workers part of wider problem

By Marshall Loeb, MarketWatch

NEW YORK  –  No matter what curveballs and disappointments life might throw at you, there always have been several unshakeable things in which you could trust: your family, your closest friends, your community  –  and, of course, your retirement, supported by your long-promised pension.

Indeed, this bond of trust has been the crucial part of the American social contract, which links workers and managers in common cause. Managers trusted that workers would be efficient, industrious and loyal. Workers trusted that the managers would treat them decently and pay them fairly, whether on the job or in retirement.

But now that trust is being ominously strained. Increasingly, Americans are being told that they won't always be able to count on their pensions to carry them through their lengthening life, not even if they have worked for decades for one of the world's great companies.

Was there ever a company that, in its heyday, was stronger, richer or more glamorous than United Airlines? Back in the 1940s, to be what we then called a stewardess for United (or Pan Am or Eastern, remember them?) was tantamount to being a Hollywood starlet. Back in the 1960s, United pilots were among the first corporate employees to earn more than six figures a year. Back in the 1980s, hundreds of United jets crisscrossed the world every day.

Today it's all different. United, beleaguered and mired in Chapter 11, has won a bankruptcy court judge's permission to default on not just one but four of its employees' under-funded pension plans. And United (UALAQ: news, chart, profile) is far from the only airline that may welsh on its deal with employees. Delta, Continental and Northwest may not be far behind. Nor may a lot of other companies in different industries, notably General Motors and Ford.

Here's an example of what workers may then expect. Not long ago, Polaroid  –  the picture-in-a-minute company that once was the high-tech marvel of U.S. industry  –  paid $47 to each of its retired employees and said that that sum absolved the company from any further pension payments. That's right, $47. Meantime, Chairman Jacques A. Nasser, who came to the company in 2002, will get $12.8 million for his shares, and J. Michael Pocock, who became CEO about two years ago, will get $8.5 million.

Losing one's pension is "a life-changing event," says Brad Bartholomew, president of The Newfoundland Group, a labor-management consulting group in Southlake, Texas. "Promises that have been made for 10, 20, 30 years are now being broken."

This shattering of trust is becoming epidemic throughout American life. So the question arises: Who can we trust?

Surely we can trust high corporate officers. More than in any other country, CEOs have long been heroes in America. But, wait. There's Maurice "Hank" Greenberg, the heroic creator of the AIG insurance empire, taking the Fifth Amendment in testimony before state and federal investigators about fraudulent accounting transactions at AIG. And the list of high executives charged with fraud  –  or convicted of it  –  goes on and on.

Of course, we can trust the feisty little man who climbed from the bottom to become the much-admired chairman of the New York Stock Exchange  –  can't we? But there is Dick Grasso, fighting with Exchange directors over his $140 million total compensation  –  wasn't it excessive?

Meanwhile, the directors on the Exchange's compensation committee, who include some of the nation's most celebrated CEOs, argue that they didn't really understand the contract with Grasso that they had approved, and thus look like boobs.

Well, if we cannot trust business to play fair and act smart, aren't there other institutions we can trust?

Take, for obvious example, U.S. politics.

House Majority Leader Tom DeLay hangs on to power despite being involved with several investigations of campaign fund-raising practices, among other questionable deeds. At the state level, Connecticut Governor John Rowland went to jail last month for illegally accepting gifts and lying about it, while New Jersey Governor James McGreevey recently quit in the aftermath of a scandal involving giving a government job and other favors to a male lover.

Then there are the American media.

The legendary CBS anchor, Dan Rather, announced his retirement from that job soon after he supported a bogus broadcast that basically charged the President Bush had evaded military service during the Vietnam War. Meanwhile, The New York Times was so shaken by a number of breakdowns lately that it formed a committee of 19 staffers to examine needed reforms to regain the readers' trust. This week the group issued a highly critical report, declaring, among many other things, "We must reduce the garden-variety factual errors that corrode our believability. In an ever more complex world, even as we speak with authority, we must strengthen and better define the boundary between news and opinion."

At very least, then, we can trust the clergy, in churches, synagogues and mosques  –  no? Well, no, indeed. Look at the sex scandals among the Catholic clergy, the ultimate betrayal of trust.

If we cannot trust the clergy  –  or our leaders in business, government and the media  –  who can we trust?

Yes, all of us know individuals in whom we still have trust. We probably have entered an era in which the people who succeed, and win our allegiance, will not necessarily be the sharpest, the fastest, the most controlling. They will be, instead, the people whose main characteristics are honesty, integrity, loyalty. In short, people whom we can trust.

Reporter Kelli B. Grant contributed to this article.

Marshall Loeb, former editor of Fortune, Money, and The Columbia Journalism Review, writes "Your Dollars" exclusively for MarketWatch.

[ Top of This Page ]

Retirees Shortchanged, Judge Rules

By Ritu Kalra, Staff Writer, Hartford Courant
April 2, 2005

A federal judge in New Haven has ruled that Cingular Wireless broke a promise of early retirement benefits worth at least $4 million to 16 former Southern New England Telephone employees.

Judge Janet Arterton ruled late Thursday that Cingular offered to longtime employees early retirement packages consisting of the full pensions they would have received at 65, but refused to honor that commitment after several workers retired.

Cingular Wireless, the nation's largest wireless service provider, said Friday it may appeal.

"We have just received the ruling, and we are reviewing all of our options," said Martin Nee, a company spokesman.

The issue dates from late 2002, when five Cingular employees opted to take the company's offer of full retirement benefits for workers over 55 with 20 years at the company or for those with at least 30 years of service. Each of the employees had worked in SNET's wireless division, and were transferred to Cingular after SBC Communications Inc. bought SNET. Eleven other employees eligible for the early retirement package also sued, but did not retire while waiting for the outcome of the case.

Arterton found that Cingular failed to include interest in its calculations of the benefits each worker was eligible to receive. Before they decided to retire, however, the employees had repeatedly confirmed the amount they were eligible for, the ruling said. The estimates they were given before retiring included interest.

The amount the workers were promised exceeded the benefits they received by about $250,000 per employee, according to Thomas Moukawsher, the lawyer who represented