Word: pension
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Tragic as the situation gripping holders of Executive Life and First Capital annuities may be, the U.S. pension system is largely stable. More than $1 trillion in assets currently backs roughly $900 billion in pension liabilities. Those assets are supported in turn by the financial strength of the corporations funding the plans...
...financial threat now looming over so many elderly Americans had its roots largely in the tumultuous restructuring that jostled corporate America during the 1980s. In many cases corporations scrambling for cash shut down their pension plans and pocketed the so-called excess funds. Some clearly acted irresponsibly, imperiling the future security of aging members of the corporate family for quick financial gain. Others terminated the plans as a defensive measure against hostile takeovers, knowing that the buyout buzzards circling overhead saw the cash from their well-stocked pensioners' funds as a tempting target and were eager to pick them clean...
Even as some employers were buying annuities to replace their pension plans, the insurance industry was running into financial hardship. Since 1975 no fewer than 170 insurance companies have gone under, 40% of them during the past two years alone. The vast majority of these failed companies were small and regional, and no retirees suffered losses. One reason: other insurers stepped in voluntarily to pick up the pieces, ensuring continued payments to annuity owners...
...heyday, Executive Life swam with the sharks. When raider Charles Hurwitz took over San Francisco-based Pacific Lumber in 1986 with the help of $900 million in Drexel junk bonds, for example, First Executive Corporation, bought more than one-third of those bonds. Once in charge, Hurwitz terminated the pension plan and grabbed the $55 million worth of surplus pension funds to pay down part of his buyout debt. He then bought $38 million worth of Executive Life annuities to cover 2,500 people, thus shedding his obligations and saving himself the cost of the premiums for the federal pension...
Similarly, when corporate raider Ronald Perelman seized Revlon in 1985, First Executive helped finance the $2.7 billion takeover, buying $370 million worth of Drexel's junk bonds. Perelman shut down Revlon's pension plan and skimmed off at least $50 million in "excess funding." He then rolled existing pension obligations into Executive Life annuities. Says Eli Schefer, a retired Revlon engineer in Sands Point, N.Y.: "Those were cozy deals, not done according to fiduciary standards. These guys should be thrown in jail. Now that I am almost 72, I've got to worry about when my next pension check...