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PENSION PLANS Spinoffs help spin benefits out of control



Published: Sat, February 5, 2005 @ 12:00 a.m.



Much to employees' dismay, companies are finding ways to curtail workers' benefits.

ASSOCIATED PRESS

Myla Nauman has the same job, the same boss and the same customers as when she worked for Abbott Laboratories. But since Abbott spun off her division as a separate firm last spring, the 22-year veteran of the company and other workers have agonized over long-anticipated retirement benefits that got left behind.

The scenario faced by Nauman and her co-workers -- now filling the ranks of a freestanding hospital products company Abbott dubbed Hospira Inc. -- is becoming increasingly common as more companies curtail pension and retiree health benefits. Hospira told workers soon after the spinoff it was freezing their accrual of pension benefits and eliminating retiree health care for many of them, even as Abbott maintained the benefits for remaining employees.

But the situation at Abbott and Hospira, subjects of a lawsuit by Nauman, a Southern California saleswoman and two co-workers, illustrates how much has changed in recent years in the way companies treat their pension obligations. And it raises troubling questions as U.S. businesses embark on a new round of mergers, acquisitions and restructuring: Could such changes offer employers an added opportunity, or perhaps even be a justification in themselves, to unload burdensome retirement benefits?

Changing times

"Every year it was reinforced to me that I was working with a promise and at my retirement ... that I would have full retirement benefits and all the pension benefits I'd earned," said Nauman, who lives in Valley Center, Calif. "I was almost at the finish line when all the promises were broken."

Whether escaping retirement obligations motivated Abbott's spinoff goes to a key part of the company's identity. The pharmaceutical and health care product maker has long promoted itself as a very generous employer. Its corporate Web site notes proudly that it was named No. 3 on Money magazine's lists of companies with the best employee benefits.

But that honor was awarded back in 2002, and much has changed at the company and the economic environment its executives must navigate.

Scores of companies have moved in recent years to shed themselves of employee benefits obligations. They've been motivated partly by skyrocketing health care costs and by interest rates and meager stock market returns that undermined their ability to keep pace with soaring future pension obligations.

"These special benefits are what have encouraged employees to stay with companies for their entire careers," said Karen Ferguson, director of the Pension Rights Center, an advocacy group. "What is not par for the course is not making good on your promises. That is what's changed, and doing it because, in the short-term, it looks good on the company's books."

What the law says

As workers at numerous companies have learned to their dismay, the federal law on employee benefits gives employers the right to make changes in their retirement plans at any time, provided those changes affect all workers without discriminating. But even in situations like the one at Abbott where benefits are reduced or eliminated, workers retain the right to pension benefits they have already earned.

Companies buy and sell businesses all the time, a fact also recognized by the law. In such cases, workers shifted in such an arrangement are deemed terminated by their original employer, allowing the new company to set terms of their benefits.

But in their lawsuit, filed in November in the U.S. District Court for the Northern District of Illinois, Nauman and her co-workers accuse Abbott and Hospira of plotting the spinoff specifically to discriminate against them. The move, they say, was designed as cover for depriving Abbott's oldest workers of their rightful benefits.

They point to several events, including a conference call on Sept. 22, 2003 -- a month after the spinoff was announced -- during which Abbott executives fielded questions from worried workers. During that call, the workers say, a top personnel executive confirmed that the hospital products division slated for spinoff was the "most senior division" in the company, noting that about 70 percent of its 14,000 workers were 40 or older.

That was obvious to workers long before the spinoff. Michael Loughery of Carmel, Ind., a Hospira sales representative who has also joined in the suit, said that at joint meetings with salespeople from other divisions, hospital products staffers stood out as the ones with the gray hair, and comprised most of those whose retirements were announced to the group.

Doing business?

The suit also draws attention to the first time Hospira reported its earnings to holders of its freshly minted shares, in August of last year. Roughly a third of the company's profits for that quarter was due to a "one-time, non-cash curtailment gain" of $40.4 million, resulting from its elimination of retiree health care benefits.

Abbott and Hospira adamantly defend the spinoff as a sound business decision that complied with benefits law.

"Abbott created Hospira as an independent company to provide shareholders with equity investments in two separate companies that are focused exclusively on maximizing opportunities in their distinct markets," Abbott said in a written statement. "Allegations that Hospira was created for any other purpose are unfounded and without merit."

Spokespersons for Hospira and Abbott both declined to comment on specific allegations in the lawsuits. The companies both say they will fight the suit, and recently filed motions to have it dismissed.

The workers who sued say the spinoff was at least as much about cutting benefit costs as for strategic business reasons.

"Once you start putting a pencil to that, to what those employees personally have accrued and will continue to accrue, you start to see the huge financial gain that Abbott is going to gain by spinning off this division. I absolutely believe that's the reason it was done," said Jane Roller, a Houston sales representative who joined the suit.

Getting less

Only Hospira workers at least 50 with 10 years of service retained future retiree health benefits in the shift. But only their years of service at Abbott will be used to determine how much they will pay for those benefits. That means workers like Loughery, who is 53, now expect to pay nearly half of health insurance premiums on retirement, compared to the 12 percent recent Abbott retirees are paying, he said.

He estimates that he will be eligible for a monthly pension check of about $1,700 once he turns 65 -- compared with the roughly $3,800 a month he expected to pocket by staying with Abbott until turning 65 and accruing further benefits.

Abbott's spinoff of Hospira is not the first time a company has been accused of reorganizing its business for the purpose of unloading benefit costs.

In probably the most notorious case, managers at Continental Can Co. in the late 1970s and early 1980s used a sophisticated computer program they called BELL -- reverse code for Let's Limit Employee Benefits -- to target for closure plants employing workers just about to reach retirement age or whose pension benefits were ready to vest. Workers sued, and the company finally settled in 1991 for $415 million.

In a closely watched case settled in 2003, McDonnell Douglas Corp. agreed to pay $36 million to settle charges that it closed a Tulsa, Okla., factory as a way to detach itself from an older workforce on the verge of claiming expensive retirement benefits.

Recently, older workers at a joint venture of Halliburton Corp. and Ingersoll-Rand have lodged complaints about the way their pension benefits were handled. When Halliburton sold its interest in the business, Dresser-Rand, to its partner in 2000, it was able to free itself from early retirement benefits many of the workers were on the verge of acquiring.

Rethinking strategy

Until recent years, many companies divesting businesses tended to hold on to pension assets and obligations, thinking that they could do very well by investing them, said Larry Moerke, who consults with companies on pension plan administration for Towers Perrin. But as those retirement obligations have turned into a significant burden, companies have rethought that strategy and are more often washing themselves of pension obligations when a business is sold by parceling a portion of plan assets to the purchasing firm, he said.

Federal pension law is clear in barring employers from taking such actions expressly to cut benefit costs. But its unclear what the law, Section 510 of the Employee Retirement Income Security Act, will have to say about situations like the one at Abbott, said Dana Muir, associate professor of business law at Michigan's Ross School of Business.

"It may even be legal," Muir said. "But in some ways I think it violates the spirit of 510 ... I think that 510 was intended to spread the pain. If employers can't afford their benefit costs, it can't target employees who are getting the most benefits."




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