Retirement Heist: how companies plunder and profit from the nest eggs of American workers

The terms of the late 2005 settlement are confidential, but securities filings make one thing very clear: GenCorp accomplished exactly what the Varity HR managers had predicted would happen in these situations: It saved money. From 2000 to 2008, the company’s liabilities for retiree health care fell almost 70 percent, to $76 million, thanks to the number of retiree dropouts and deaths. And even with the settlement, the plan’s costs have continued to fall steadily. Every year after 2005, the retiree health plan actually contributed a total of $8.4 million to GenCorp’s quarterly earnings. Regardless of whether a company wins or loses its case, it always wins the game.

PREEMPTIVE STRIKE

As companies grew increasingly eager to cannibalize their retiree benefits over the past decade, they realized just how important it is to get their cases heard by the right court.

The first legal hurdle for many was that, like Varity, they had promised the benefits, often in writing. Ironically, one of their most powerful tools was federal pension law, which had been enacted in 1974 to protect employees and retirees. The ERISA law was intended to thwart employers who promised retiree benefits and then refused to pay them. Until then, pension and benefits agreements fell under state contract and trust laws. ERISA was supposed to be an improvement, because it overrode a patchwork of state laws.

The problem was that the law was written for pensions, so it had rules about funding and vesting. If someone had a vested right to a pension, the company couldn’t just decide not to pay it. But ERISA didn’t explicitly mention vesting of medical pensions. So employers argued that retiree health benefits weren’t vested but were merely the equivalent of a gratuity.

Until the early 1970s, all retiree benefits—pensions and medical coverage—fell loosely under state contract laws. If there was a dispute about benefits, the courts would examine the plan documents and handouts given to employees to see whether pensions and retiree health coverage were promised benefits, which must be paid, or, indeed, as employers later insisted, the equivalent of tips.

Employers attacked the problem of written promises by introducing ambiguity into the equation. They began inserting clauses, or sometimes a single sentence, into the technical documents that described the rules and workings of the benefits plans. These reservation-of-rights clauses state that the employer has reserved the right to change the benefits.

General Motors, which figures so prominently in discussions about troubled pension plans, has played a big, largely unsung role in the dismantling of retiree health benefits, for both union and salaried employees, across all industries. In the 1980s, GM promised lifetime health coverage as an incentive to get employees to retire. A total of 84,000 salaried employees ultimately took the bait.

When GM later cut the benefits, retirees sued for breach of contract, pointing to the written promises: “Your basic health care coverage will be provided at GM’s expense for your lifetime.” You’d think a sixyear-old could decipher that. A contract, after all, is a contract. Without contracts, the U.S. economy would fall apart. Think how this would play out in a small claims court. Judge Judy would ask the plaintiffs, “Do you have a written agreement?” She’d then ask GM to explain why it reneged on the deal. “Your honor,” GM would say, “Sure, we promised, in writing, to pay for health coverage, but costs have gone up, and now we don’t want to pay.” Judge Judy would say, “I’m not interested in your problems. You’re an idiot. Judgment for the plaintiff.” Not so under ERISA.

A lower court ruled for the retirees. GM appealed, and the Sixth Circuit Court of Appeals in Cincinnati ruled in 1998 that it didn’t matter what the company had told people verbally, and it didn’t matter that the company gave prospective retirees brochures that advised them that health coverage would be provided “at GM’s expense for your lifetime.”

What mattered, the appeals court said, in Sprague v. General Motors, was that GM had added an escape clause to the summary of the plan documents (SPD) it gave the first group of retirees. The clause, included in the documents that few employees read, and even fewer understand, stated that GM “reserved the right” to make changes to the plan. “We see no ambiguity in a summary plan description that tells participants both that the terms of the current plan entitle them to health insurance at no cost throughout retirement and that the terms of the current plan are subject to change,” the court said.