Pensions: Pitfalls in the Fine Print

IN the Depression '30s, a lanky South Dakota doctor named Francis Townsend won the backing of millions of elderly Americans with his plan for $200-a-month pensions for everyone over 60. Today his scheme, which most economists once dismissed as a crackpot idea, seems almost conservative. It has been upstaged by a combination of Social Security and private pension plans that offer retirement income to workers as a matter of course. Still, the difference between plans and payoffs is often painful. Many of those who lost their jobs during last year's recession and this summer's slow recovery are learning a new truth about pensions. Buried in the fine print of many labor contracts and corporate retirement plans is a clause stating that an employee's pension is not "vested" --that is, his employer's contributions do not belong to him--until he has worked for the company a score or more years. If he switches jobs or unions before then, or is laid off, or if his company goes bankrupt, he is left with nothing but Social Security.

Voter Concern. Originally designed to persuade valued employees to stay with a company, delayed vesting has become a pitfall for those who do not. According to the U.S. Department of Labor, from 30% to 50% of the 30 million workers covered by private pension plans will never see a nickel in benefits. They will either change jobs --or die--before they become eligible for a pension, or the fund that manages their money will be unable to pay up. Each year, some 30,000 workers lose out on pensions simply because their employers go broke.

The problem is faced by blue-collar and white-collar workers alike. One concerned group, for instance, is the 125,000-member Council of Engineers and Scientists, whose membership has been hard hit by mass layoffs in the aerospace industry. This week, as vacationing Congressmen meet their constituents, pensions will undoubtedly register high among the topics of voter concern. New York Senator Jacob Javits reports that his mail on the subject runs second only to Viet Nam.

The reason was made clear at a series of hearings held by New Jersey Senator Harrison Williams just before Congress recessed two weeks ago. One witness, New York Shoe Salesman Murray Finkelstein, recounted how he piled up pension credits for 19 years. Then, last year, the store where he worked went out of business. Now he must work for 15 more years before he can draw a pension under his new employer's plan. "I will have to be 75 before I can retire," he told the committee. "I've had a heart attack and I don't know if I can last until then." Two Detroit machinists formerly employed by the Michigan Tool Co., Earl MacLeit and George Silver, told similar tales of woe. Each of them was laid off after more than three decades of steady work when Michigan Tool's parent company, ExCellO Corp., decided to move the Detroit operation to North Carolina. The men were not invited to relocate. Now they subsist on unemployment checks.

To protect others from a similar plight, the subcommittee is considering legislation drafted by Javits, as well as other proposals. Generally, they would require companies to:

> Give their employees an irrevocable right to a percentage of their retirement pensions after a fixed number of years. Javits' bill would grant 10% vesting after six years' service, increasing to 100% after 15 years. Another proposal, by Consumer Advocate Ralph Nader, calls for legislation that would create pension-fund trusts to manage individual employee retirement funds--no matter who their employers are.

> Set aside enough money each year to meet pension obligations. In some cases, fund managers plowed millions into speculative stocks during the 1968-69 bull market only to see their investments shrivel during the 1970 slide. Other companies did not bank enough money during lean years, and are now burdened with enormous liabilities. Uniroyal Inc. "owes" $450 million to its fund; Western Union, which last year paid the equivalent of $2 per share to meet its fund obligations, would have to pay 44% of company assets--$365 million--to fund its pension plan fully. -- Set new standards for the administration and financing of pension funds --by companies or unions. The committee intends to hold further hearings this fall, and will have no lack of examples of mismanagement. Last year officials of the United Mine Workers were found in breach of fiduciary trust for allowing millions in assets to languish in a mine-controlled bank. The D.C. Transit Co. invested $2 million owed to its workers' pension fund to finance its own real estate. Javits' bill would compel fund managers to buy insurance against defaults or bankruptcies.

Businessmen, particularly pension-fund managers, who control more than $130 billion in assets--the largest pool of private capital in the country--are wary of the bill, particularly of its provisions for mandatory vesting. Jean M. Lindberg, senior vice president of Chase Manhattan Bank, a major fund manager, predicts that pension costs could go up from 5% to 15% for many companies if Javits' bill is passed. For some industries, particularly those with high employee turnover--such as the hard-pressed textile industry--the extra cost could go as high as 20% and drive them out of business.

Fresh Load. The basic problem for management is that pension funds are already overloaded with large commitments. Businessmen point out that precedents set by public employers, such as New York City's agreement last spring giving firemen full pay after 40 years of service, are destined to become ammunition for labor during future bargaining. Over the past decade, employer contributions to pension funds have increased by 133.3%, but the funds' obligations have risen by 234.9%. The difference is being made up largely by the growth of fund investments. But some experts expect that if the trend continues, fund managers will have to increase employer contributions or look for high-yield investments that often carry high risks as well. Any fresh regulatory load would only increase the demands on the funds.

The Nixon Administration has a task force at work on a version of pension reform that is milder than Javits' bill. But business opposition and the immense complexity of the subject could well forestall passage of any bill this year. 1972 could be a different matter. Few legislators would want to vote against safer pensions in an election year, and popular interest might well soar as rapidly as it did for Medicare. The most compelling case for reform was summed up by Senator Javits: "It is a rare thing to find a major American institution--private pension plans --built upon human disappointment. We should be moved to act with determination to make that institution deliver upon its promises."

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