CAMBRIDGE, Mass. - Lump-sum payouts related to job cuts and poor market conditions are contributing to the depletion of Polaroid Corp.'s $900 million cash balance pension plan, and the potential for more of the same could lead to continued funding problems as the troubled firm restructures.
The Cambridge-based firm, which declared bankruptcy last fall, has seen its pension plan go from slightly more than fully funded at the end of 2000 to 10% underfunded as of Oct. 1.
A 1998 decision to convert to a cash balance plan and offer lump-sum payouts upon termination or retirement might have exacerbated the funding situation, as funding levels dropped dramatically in the past year.
"In this economy it's very problematic, not just for Polaroid but for lots of companies that have amended their defined benefit plans to have lump-sum payments and now find that they are laying people off," said Diane Fuchs, benefits attorney with the Washington law firm of Womble Carlyle Sandridge & Rice.
Pension fund assets have declined 22% since the end of 2000, said Polaroid spokesman Skip Colcord, as the company felt the effects of market depreciation and an increased demand on benefit payments because of two rounds of layoffs. Last February, the firm laid off 950 workers; in June, another 2,000 employees were let go. Mr. Colcord had no figures on how many terminated employees took the lump-sum option.
And Polaroid has no plans to change the lump-sum option, despite the pressure being put on the fund. "It's a benefit that our existing employees value and one that we don't have any intention of changing," Mr. Colcord said. "If you took the lump-sum option away, there would be a lot of concern among our work force that sees that as a bona fide benefit."
But a group of retired Polaroid executives sees it differently. They say the lump-sum option is draining the plan of its assets, and they would like to see it eliminated.
Because Polaroid filed for bankruptcy and is restructuring, more employees could be leaving the firm or opting for early retirement. The group of retirees is concerned that a significant number of the departing employees could take lump-sum payments and depress the plan's funding level even more.
"If, as a result of these factors, the plan were to be terminated, then my clients' benefits would likely be reduced," said Frederick McClure, benefits attorney with Hinckley, Allen & Snyder, Boston, representing the former Polaroid employees. The group of about 20 retirees has not filed a suit against Polaroid, but is encouraging the firm to eliminate the lump-sum option.
If the plan is terminated and turned over to the Pension Benefit Guaranty Corp., these retirees would lose some of their benefits because they now receive more than the PBGC pays out. The PBGC has a limit to benefits based on a variety of factors, and in 2002 the maximum would be about $43,000 per person.
If the PBGC were to take over the Polaroid plan, then the group would consider filing a damages claim against the company, said Mr. McClure.
"The issue the Polaroid case demonstrates is that a lump-sum option, given a certain set of circumstances, can have a very substantial effect upon a pension plan," said Mr. McClure. The circumstances at Polaroid are: declining assets due to market depreciation; increased demands for distributions because of layoffs and restructuring; and increased amounts of lump-sum payments due to low interest rates. These factors, coupled with the firm's filing for bankruptcy and not sustaining funding levels through contributions, led to the depleted pension fund, he said.
Mr. Colcord said there are no plans to make any contributions to the pension fund for the immediate future. He said nothing has changed with regard to the daily operation of the plan; it is run now as it always has. However, the company does hope to improve its financial situation by selling off all or parts of itself.
Gary Pastorius, spokesman for the PBGC, said the PBGC has a person working with Polaroid through its reorganization.
Mark Weisberg, benefits attorney at Katten, Muchin, Davis in Chicago, doesn't expect to see the PBGC step in, at least not right away. Typically, the PBGC allows bankrupt companies to go through the reorganization process before making any decisions. Also, the market could turn around.
On the other hand, Mr. Weisberg said, interest rates are so low right now that lump-sum payments become even more attractive to employees should they decide to leave or are laid off.
Kevin Wagner, actuarial consultant with Watson Wyatt Worldwide, Detroit, said a number of firms converted their pension plans to include the lump-sum option in recent years primarily because it was what employees wanted. But in a volatile economy, he said, it might be more beneficial to have a diversified benefit payout stream.
Polaroid's employee retirement package also includes a 401(k) plan and an employee stock option plan. The 401(k) plan had $695 million in assets through Dec. 31, 2000, the latest data available, said Mr. Colcord. While the plan still exists, Polaroid stopped making matching contributions last summer. Mr. Colcord did not know the percentage of assets in company stock, but the 2002 Money Market Directory lists 20% of the assets in company stock. The stock price dropped from $5.81 per share on Jan. 1, 2001, to 28 cents per share Oct. 12, the day Polaroid filed bankruptcy. It's now trading around 8 cents per share.
The ESOP was sold off on behalf of employees in November. The firm decided it was in the best interest of employees to sell the shares because the stock was not likely to have any value and shareholders would not recover any investments. A total of 7.2 million in shares were sold at a price of $9.46 per share.