Defined benefit plan obligation split in power plant sale between sell

[Guest rambutan]

My power plant complex is to be sold. The acquiring company has a similar benefit plan to the selling corporation. Employees are said to be retained, so no break in employment happens, hence no severance package. But years of service with the seller's pension plan cease with the sale, no more accrual or COLA happens, and we get the annuity value from the seller's defined benefit plan when we retire 10-25 years down the road, coupled with a seperate pension from the years of service with the new employer. Assuming the same career path at the same power plant, we appear to be in for a screwing.

If I remained employed at the original company, my annuity is calculated at [30 yrs X 110,000 (est highest 5 yr income at end of service) X actuarial constant]. Now, the calculation will be [(15 yrs X 61,000 X actuary constant) + (15 yrs X 110,000 X the constant)]. For the same career, the math shows at least a 25% reduction in future benefit value - not factoring in inflation. The seller's pension plan assets are 40% overfunded, but all pension assets associated with the seller will be retained with the seller. No transfer of pension assets takes place. No retention package is offered by the buyer.

Given that we are hardly the first group of employees to find ourselves in this situation, how has this sort of issue played out in the Courts? Do we have any recourse or protection? Are there any legal cases that have resolved this question?

[Guest]

Before I/we can respond, I need some further information:

1) Are you saying that your current pay is $61,000 and you assume your final salary will be $110,000?

2) What exactly do you mean by "actuarial constant"

3) What is the current plans "actuarial constant"

4) What is the new employers plans "actuarial constant"

5) In one spot you say you will retire in "10-25" years, then you do a calculation using 15 years with old plan and 15 with the new plan. What are your actual ages at hire, transfer & anticipated retirement.

6) Could you give a specific example of how the benefit would be calculated under either the current plan or the new plan?

Also, more importantly, your concerns are valid, BUT the only person really qualified to address them is your own HR department or the actuary for the current and future plan. No-one on this board could possibly have enough information to accuratly address your questions, although we may be able to help with some of the concepts.

[Guest rambutan]

Keith, I appreciate your response, and questions. I don't need an exact backup benefit calculation. I need a handle on the concepts. To start with, let me at least respond to your questions.

1) Are you saying that your current pay is $61,000 and you assume your final salary will be $110,000?

Actually, my current pay has averaged about 93K over the last 5 years. Since I am one of those high-paid hourly technical folks, a lot of what I make is omitted in the covered compensation, which is 61K ave over five years. In 15 years as a member of MGMT and director of a technical group (something I've already filled in as), a 110K average is actually conservative.

2) What exactly do you mean by "actuarial constant"

3) What is the current plans "actuarial constant"

4) What is the new employers plans "actuarial constant"

I'd like to answer all three at once, if it's OK with you. By a constant, I mean those benefit plan multipliers, dividers, and penalties that whittle my current employer's pension plan payments to me down to a 1528/month annuity if I somehow reach age 65 - nothing before then without major penalties (early retirement and the rule of 85 ends with the termination of our participation in the plan, although our continued employment is never terminated. The rule of 85 - hopefully you know that term - no penalties on the pension if years worked plus age reached 85). From what I have been able to gather from the company "spokespeople" of both firms, the sucessor plan benefits are "equivalent" for the actual years worked. Lets take that as a given, and make an equation that eliminates the "actuarial" constant (I take it from your response that in the HR biz it is not called that) from both sides of the equation:

5 year highest bucks times 30 years DOES NOT EQUAL 5 year highest mid-career buck times 15 years + 5 year highest end of career bucks times 15 years. As I stated, the amount appears to be 25% less.

Other information that may be pertinent is my current employer calculates the 15 year benefit upon "termination" as in when start my first day of work in the same job with my new employer. Assumptions: Pay cap - YES. Apply 415 limit - YES. Social security CPI, WB inflation rates - both calculated at ZERO. Add years to age, add years to service - both ZERO. Amount of overfunding in current plan added to calculation or transferred to new employer's plan in the form of pension assets - ZERO.

Note: Let me send this incomplete. I just got called to go out and my Internet connection is severed if no mouse clicks or keystrokes happen in 10 minutes.

[Guest rambutan]

Continuation: (This was the perfect call away - 10 minutes only! I'm back to finish)

5) In one spot you say you will retire in "10-25" years, then you do a calculation using 15 years with old plan and 15 with the new plan. What are your actual ages at hire, transfer & anticipated retirement.

My first posting was a "we" statement, myself and co-workers are all part of the 10-25 years to retire range. My actual age is 40, was hired at 25 after college and 6 years of military service, and have 15 years after I "terminate" while maintaining continuous employment (for ERISA) and start a new pension with my new employer, upon which completion I hope like heck to be able to do early retirement and not have to eat cat food on my golden years.

6) Could you give a specific example of how the benefit would be calculated under either the current plan or the new plan?

I get 1,5280.13/month at age 65 from my current employer. The provision for early retirement access to the pension goes away. Accrual details with the new employer have been deemed by the current HR pension plan administrator as "equivalent" for the benefits gained from each year of service with each new year's annual compensation factored in. No documents detailing the new firm's benefit plan has been received, but verbal assurances that "Your amounts are equivalent for each year you work with the new employer." Except that years of service goes away since we start on a brand new pension plan, and again, it looks like it is at least a 25% loss of Net Present Value, all other factors constant, plus, no option for early retirement without substantial penalties.

A subtle fragrance of dead rat permiates this set up.

Keith N's Conclusion: "Also, more importantly, your concerns are valid, BUT the only person really qualified to address them is your own HR department or the actuary for the current and future plan. No-one on this board could possibly have enough information to accuratly address your questions, although we may be able to help with some of the concepts."

Let me close with a response to your last paragraph. Starting with the fact that I have worked with many HR people, respect many in the profession a great deal, and have no axe to grind with anyone just because they chose this challenging and satisfying career path. (My MBA has a HR concentration). However, one reason I posted this is I simply don't trust the HR Department at my current employer. They are matrixed along with Admin and Corporate Legal to the Corporate Officer who got her start as a corporate employment lawyer and who now has the hat of "Corporate Manpower Process Owner". Pretty warm title, that. Last year, I asked HR why we had been refused an extra half hour of pay for job setup for the next shift. A practice that had gone on over 10 years. The answer was that although hourly employees, we were actually in fact "well paid professionals" not covered, and that the extra half hour was just "non real work". When I went up the chain of command in HR and called them on that, and asked for a written explaination, the next day I was dealing with Corporate Legal. 5 ugly months later, we got the back pay we were entitled to under the FLSA, but let me say the lawyers do not share in the generally positive feelings I have for the HR profession. The lawyers were arrogant, tried every delay tactic in the book, fought every claim, and worse of all, simply didn't show any respect for non-lawyer hourly employees ability to press a FLSA claim. HR was no help after the lawyers took charge. Guess what - we won back pay, in full - and in a final disrespect, the lawyers and HR refused to show up at the settlement meeting.

The actuary is a contractor, and is of no help. The actuary for the purchaser is unknown, but the beef is with our current employer, not the puchaser.

FINALLY, YOU ARE CORRECT. WE ARE NOT INTERESTED IN THE BOARD PARICIPANTS ACCURATELY ANSWERING WHAT PENSION SHOULD BE RECEIVED TO THE DOLLAR. WHAT THE REAL INTEREST IS ARE THE CONCEPTS, PAST PRECIDENCE. ARE WE BEING SCREWED HERE? IF SO, CAN ANYONE RECOMMEND A PATH THAT WE COULD TAKE THAT ADRESSES LEGITIMATE CONCERNS, AND ACHIEVES A WAY TO GET RECOURSE? I PERSONALLY ONLY WANT TO SEEK WHAT IS DUE ME FROM YEARS OF HARD WORK. I AM NOT LOOKING FOR A WINDFALL. THE FIRST MOVE WE ARE MAKING IS TO FORM AN ASSOCIATION (110+ MEMBERS). WE NOW FACE THE BIG QUESTION...

WHAT DO WE DO NEXT???

[david rigby]

Such long discussions!

I understand your perspective about being "screwed", but that is merely the definition of the benefit. That is, the plan defines what comes out of the plan by using a formula. That formula includes service and final average comp, both determined as of the applicable date (that is, death, disability, retirement, or other termination of employment).

Yes, your benefit will be less at 65 than if you had remained in one plan, but that is exactly how this type of plan works. It is not designed to "hurt", but is just the opposite, to "reward" long service. This is just what happens when any employee changes jobs. Of course, in this case, the "other termination of employment" is not your choice. Unfortunately, it appears to be a motivation for ill feelings. I'm not trying to defend anyone or anything, just describe.

There really is no "actuarial constant" as described in your first post. Instead, use "service".

[Guest]

I kinda had to wait for the dust from that long post to settle.

To answer your basic question, yes, the combination of the two pieces could, and most likely would, be less than the original one, assuming all multipliers and reductions are equal. You have already descibed the reason.

Is this legal? Sure, you no longer work for the seller and you now work for the buyer. The seller is treating you like every other terminated participant and the buyer is treating you like every other new hire.

Is it fair? Thats not for me to decide.

Are you gettin "WHAT IS DUE ME FROM YEARS OF HARD WORK"? probably, you are receiving what was promised to you, based on your service through the date of sale, ie: your date of termination.

Can the buyer amend their plan to consider years of service with the seller for the calculation of benefits? Yes

Will the buyer be likely to do that? No, not without receiving additional assets to offset for the significant additional benefit liability it will be taking on.

I couldn't really tell, but it seemed that you were implying that the plans (buyers and sellers) were not being merged, but that the seller was going to continue to maintain their plan and the seller was just going to maintain theirs. Therefore, you are being treated as if you terminated with the seller and were hired by the buyer. That is you are in the same position as someone who quit working for the seller and took a job with the buyer.

Again, without seeing the specifics of the plans, employment contract and the merger agreements, it's impossible to tell if either side is not providing something they agreed should.

[Guest rambutan]

Thank you Keith N. This reply is much shorter. Prior to the sale, the seller is downsizing 1/3 of the work force. A lump sum option severance package is offered. 1/3 more of the workforce is projected to lose their employment in the first five years the buyer is in charge of the business (through new efficiencies, technology changes, and consolidation). Those employees are promised a severance package with no lump sum option, due to electric industry deregulation worker protection legislation. The last 1/3, which I am designated to be part of, is characterized as "retained" for the long haul, with no severance or retention package coming with the seller's benefit plan termination. They have stated that no package offer is legal because if they do offer it to employees "retained" by the buyer, they have effectively "terminated" the pension plan itself, with huge tax liabilities.

The selling firm's decision has NOTHING to do with the fact that the plan is 45% overfunded and a good portion of the plan assets revert to the firm.

If I stay, all I get is a reduced pension (and my same career - I should be SO grateful). We also appear to lose the early retirement feature of the terminated seller's plan. If I retire at 55, I get 75% of the buyer's pension benefits that I built up, but as a "terminated" (benefit plan) employee of the seller, evidently I get 37% vs. the 75% of that benefit if early retirement starts - a measure that was placed into the plan to discourage employees from "leaving" the firm.

Again, I just want to see if Keith N or anyone else has any suggestions on a way I and my fellow employees, especially the "retained", ever so valuable 1/3 of the employees get a fair shake, or at least come to understand the concepts better?

Failing that, how do the "job-retained but for all other purposes terminated" employees go from being top performers to being bad enough in our performance to get canned in the next 5 years? That is the next best hope in this Kafka-esque situation.

[Guest Brian4]

I understand the pension transition, or perhaps non-transition is a better description, has adversly affected you and your associates. The non-transition is somewhat like putting continuing employees in the same position as new hires. If the company wants to retain workers, pension plans, as a source of long term deferred compensation, would be useful. The changes you described could result in the best employees going to another employer.

Legally, from the old plan, you are entitled to the accrued benefit, based on service and compensation up to the date of the sale and your termination with the old company. Private pension plans are voluntarily sponsored, and the new company is not required to offer you any retirement plan. As Keith N. and pax pointed out above, the pension transition could (or may) be structured to provide better benefits than you described. Your situation is somewhat like the IBM situation, where projected (or future) benefits have been reduced. The status of employment laws and pension protections is something to keep in mind when you vote. The Vice President supports proposals that would help employees when their pension plan are redesigned. There is a h-u-g-e difference between the positions of the two Presidential candidates on these matters.

Your story reminds me of an article I recently read. It was regarding the pension plan at a large, unionized public utility company. One sentence read: "These divergent interests, all satisfied by the same plan provisions, can become a source of conflict and negotiation, a fact borne out by the experience of the immediate parties who, for the past ten years, have been in constant conflict over the appropriate use of surplus monies in the pension fund and in the extent of the employer's duty to preserve pension rights in the face of massive restructuring and downsizing."

The technical points of the plan do matter. For example, the old plan could have been designed to include the other compensation in the calculation of your benefits.

Note that 42% of non-union employees are covered by a defined benefit plan, versus 79% of union employees.

Forming an association is a form of collective action. You could look at the pension activists websites. You could also contact a union that represents employees in your industry or occupation. If employees opt to be represented by a union, then the company must provide the union with information on pension plans, and meet and negotiate with the union. You can expect attempts to be represented to draw the attention of the "Corporate Manpower Process Owner."