Penny Pinching the Retirees at GE

by Vincent Lloyd

“It’s a tragedy and it’s unjust,” says Helen Quirini of her $736 per month pension check from General Electric, “People that retired a long time ago are really being discriminated against.”

The 81-year-old Quirini lives in Schenectady, New York where she worked for GE for 39 years; she retired in 1980. Like all GE retirees, her pension check will only increase if the company unilaterally and voluntarily decides to increase it, regardless of gains in the value of GE Pension Plan assets or inflation.

“We were the ones who helped to develop the refrigerator and the radio,” says Quirini. But “while we [employees] are nice people and keep working hard, [GE management is] out all the time trying to figure out how to screw us” with “accounting gimmicks.”

Quirini and other pensioners are fighting for reforms to the GE pension system, including increased benefits and an automatic cost of living adjustment. They have mounted a major campaign at GE shareholder meetings, introducing resolutions to improve the pension system that have received dramatically high levels of support. But like almost all such resolutions, the shareholder initiatives have not been able to garner a majority vote against the recommendations of management.

The overfunded pension plan, built in large part by employee contributions, can easily afford to pay more, say the retirees. Instead of benefiting workers, they contend, pension fund revenues are artificially lifting GE’s reported profits and otherwise helping the company.

“You are considered the guru of the industry, why don’t you show some moral leadership,” Quirini asked GE CEO Jack Welch at a shareholder meeting.

Overfunded, Underpaid

The General Electric Pension Plan covers 485,000 people, approximately a third of whom are retirees.

The assets of the pension plan — mainly invested in stock and real estate — have grown quickly in recent years. The plan’s assets currently total $49.8 billion, an increase from just over $30 billion in 1995. But liabilities — the amount of money that the GE estimates it will have to pay out to retirees — have only gone from $22 billion to $28.5 billion, meaning the plan’s surplus now exceeds $20 billion.

In fact, the pension plan is doing so well that GE stopped contributing to it in 1988. The company would incur an excise tax if it made additional contributions.

But GE has not shared the wealth. GE still requires employees to contribute out of their wages to the pension fund. Most upsetting to the workers, the surge in the pension plan assets has not translated into increased benefits for retirees.

These benefits are fixed from the day an employee retires, and are only increased if GE decides to increase them. “Because of depreciation,” Quirini says, “the best day of your life when you retire is the day you retire.”

For instance, a 1981 retiree who initially received a $350 monthly pension today receives a monthly pension with a real value of $318 in 1981 dollars. Some pensioners have experienced losses in purchasing power of as much as 22 percent. GE provides automatic cost-of-living adjustments to the wages of its current employees, but has refused such adjustment for retirees who are most dramatically affected by the loss of purchasing power.

Despite repeated requests, GE declined to respond to requests for comments on its pension fund.

GE's Vapor - and Real - Profits

Meanwhile, GE has reaped huge gains from the pension system.

Under current law, GE is able to report some pension plan income as corporate profit, even though it cannot actually take the surplus funds. An accounting rule permits companies to show the interest earned by their pension fund as revenues on their corporate balance sheets, artificially boosting the bottom line.

Tony Daley of the Communications Workers of America calls these earnings “vapor profits.” Last year, these “vapor profits” accounted for more than twice as much of GE’s profits as did its appliance business.

“It’s a perverted use of the [pension] fund,” says Steve Tormey of the United Electrical, Radio, and Machine Workers of America (UE), “it’s not just a benefits plan, it’s a GE profit center.”

Reporting pension plan earnings as corporate profits enables GE, known for its steady earnings growth, to “smooth out” its profits and meet projections, according to retirees and union officials. “What they want is predictability,” Tormey says, “they want to hit that target on the head.”

The paper profits mean extra cash in company executives’ pockets. Pension fund earnings inflate senior corporate officers’ bonuses tied to company profits by as much as 9 percent.

The entire arrangement is unjust, given that GE no longer contributes to the pension fund, as well as misleading to shareholders, says Tormey. Most seriously, he argues, GE’s interest lies in keeping the pension plan overfunded, so it can continue reporting vapor profits and enhancing executive bonuses. That sets GE’s interests directly against improving benefits to retirees.

In a recent letter, the Securities and Exchange Commission directed corporations to more prominently explain that some reported profits might be coming from pension plan income. Currently, GE only discloses this in a footnote to the financials section of its annual report.

GE has also accrued real profits from the pension plan. GE earns millions of dollars from managing this pension plan through General Electric Asset Management (GEAM). “The administrative costs have gone up nine or ten fold in the past decade,” says Tormey. “GE receives fees just like if [the plan] was externally managed.”

The company has done so well at managing its own employees’ pension money that it is now marketing its pension management “products” outside of the company. GEAM currently manages more than $35 billion of external assets, $6 billion of which were newly under management in 2000. There are now more than 190 external clients of GEAM, ranging from DaimlerChrysler to the Teachers’ Retirement System of the State of Illinois.

Although the pension plan is supposed to be run for the benefit of employees and independently of General Electric, UE officials point out the appearance of conflicts of interest between GE and the pension plan. All of the GE pension plan’s trustees are employees of GEAM. GEAM and other divisions of General Electric, notably GE Capital, have overlapping stock holdings and other interests. However, in filings to the Securities and Exchange Commission, GE (the parent company) “disclaims” the holdings of its separate subsidiaries, formally stating that it has no interest in their transactions.

With the pension fund burgeoning with assets, retirees fear that GE might try to get hold of their money for corporate purposes: “I wouldn’t be surprised,” Quirini says, if GE eventually were to use the overfunded pension plan for acquisitions or other non-pension purposes.

“In the 1980s, hundreds of companies took advantage of a loophole in the law that allowed them to simply terminate their pension plans and then siphon off the surplus assets,” explains Karen Friedman of the Washington, D.C.-based Pension Rights Center. Corporate raiders including Ronald Perelman and Charles Hurwitz exploited this rule to finance corporate takeovers and acquisitions.

Congress finally closed the loophole in the law a decade ago. But both the House and Senate passed legislation that would have re-opened the loophole, and only a veto by President Clinton blocked its enactment. Friedman is worried that new attempts at rolling back the law might be more successful. “The Bush regime, given their alliance with big business, might be much more amenable to corporate theft of pension plans,” she says.

“Why would GE or any company be so cheap and so fanatic about accumulating a mountain of cash?” asks Chris Townsend of UE. His answer: “so that some time they can foster a political environment where they can recapture the [funds].”

Retirees Rising

Workers and retirees have little direct influence over how GE manages the pension fund. The U.S. Supreme Court ruled in the 1971 case of Chemical Workers vs. Pittsburgh Glass that “retiree benefits are not … a mandatory subject of bargaining.” GE has taken advantage of this ruling, refusing to negotiate with its unions about pension benefits. When the company decides to increase pension benefits, it does so unilaterally, and often only for certain pensioners.

But GE pensioners have been doing what they can to put public pressure on the company to reform its pension system. The GE Retirees’ Justice Fund has been sponsoring trips of disgruntled pensioners to GE shareholders’ meetings for the past five years. Pensioners, clad in t-shirts with the slogan “GE: Bring Good Things to Retirees, Please” have distributed leaflets featuring a General Electric “Hall of Shame” — pictures and descriptions of long-time GE employees and the sizes of their pension checks. Their high-profile campaign has won some modest concessions from GE.

“They’ve been a role model for retiree groups across the country,” says Friedman of the Pension Rights Center.

The retirees have noted with anger that at least one GE employee does not have to worry about hardships in retirement: outgoing CEO Jack Welch will be receiving annual pension benefits worth at least $3.9 million. Until recently, members of the GE Board of Directors received pensions of $6,250 per month (about six times the average amount received by a 30-year GE employee). Following a 33 percent vote in support of a shareholder resolution seeking to end these pensions, the Board decided to reform itself.

Whether the retirees can muster the power to win their primary goals — a higher pension check and an automatic cost of living adjustment — is uncertain, however.

“I am always optimistic about fighting injustice,” says Quirini. “We’ve been effective, but not enough.”

She muses that things might improve with the departure of the hard-driving Welch. “Welch is leaving at the end of the year and [incoming CEO Jeffrey] Immelt — who knows — maybe he will have a heart.”

Vincent Lloyd is an intern with Multinational Monitor.