BASKING RIDGE, N.J. - AT&T Corp. and its union workers found little common ground in recent contract extension talks, but disagreement over using the company's $4 billion pension fund surplus for severance payments to thousands of employees expected to be laid off this year proved particularly thorny.
The Communications Workers of America, Washington, publicly blasted AT&T. The plan to use the company's pension surplus for severance was "a raid on our members' pension fund, enabling the company to push downsizing costs onto workers," said Ralph Maly, the union's vice president for communications and technologies. "Our members would be financing their own job loss."
But AT&T officials say there never was any plan to use the surplus to pay severance, and the union distorted provisions of the company's contract extension offer.
AT&T's extension offer is off the table now that the union has rejected it. The two sides will meet March 11 to start negotiating a new contract for the 28,000 workers represented by the union. The current contract expires in May.
Amid the labor squabbles between AT&T and its union, however, lies a serious issue: whether companies should tap pension surpluses built over the years to pay severance packages to workers whose jobs are being eliminated as part of corporate cost-cutting measures.
Lucent Technologies Inc., Murray Hill, N.J., said early last year it planned to use a small portion - less than 1% - of its roughly $52 billion pension plan to finance severance packages for 10,000 employees it planned to lay off. At the time, Lucent's plan had a $20 billion surplus.
"There's a trend toward using pension assets for that purpose," said Bob Walter, principal and benefit consultant at Buck Consultants Inc., New York. "We've seen quite a bit of it among our clients and other organizations."
Mr. Walter declined to name any Buck clients that have used pension surpluses to pay severance, saying layoffs and severance aren't things companies want to talk about.
The most obvious appeal for a company is that using surplus pension assets for severance pay frees operating capital to use for other purposes, Mr. Walter said. Employees can benefit because severance payments made from a qualified pension plan are eligible to roll over into other qualified investments, such as an individual retirement account.
But there are drawbacks, too. For laid-off workers younger than 55, a severance payment from corporate pension assets is subject to a 10% excise tax. If the company does not take that amount into consideration when calculating the payment, the employee immediately loses part of the anticipated severance to taxes, Mr. Walter said.
And for corporations, there can be more paperwork involved, complicating the process.
Additionally, companies with union workers must get the union's approval to use pension assets to pay severance, Mr. Walter said. That's something he hasn't seen many unions eager to do. As a result, using pension surplus to pay severance for non-union employees is more common.
Union claim not unusual
Amy N. Moore, an employee benefits attorney with Covington & Burling, Washington, said unions often assert a claim to surplus pension assets.
"Sometimes that's made clear in the collective bargaining agreement, but sometimes it is not as clear to the company as it is to the union," Ms. Moore said. "There's dispute over whether they (the unions) have that power. Some companies take the position that they've bargained over benefits, but as long as they provide them the surplus is not something the union has a say over."
Communications Workers of America spokeswoman Candice Johnson said her union would never allow such a provision in any new contract.
"It's something we have to agree to and which we will not support," Ms. Johnson said.
Ms. Moore agreed that more of her corporate clients are considering using or have used surplus pension assets to pay severance. She declined to name any of those clients.
She said companies generally only consider such a move when:
* reducing their work force by offering employees early retirement or through voluntary separations or layoffs;
* closing operations at a particular location; or
* making divestitures.
"All three things tend to happen more in a down economy and have been happening more over the last year or year-and-a-half, and that has given rise to companies using pension assets to pay those benefits when they can and when it makes sense to do so," Ms. Moore said. "The same pressures that are causing them to lay off employees also lead to them not having a lot of surplus cash."
But not everyone has identified the trend. Richard L. Potter, executive consultant at Chicago-based Becker Burke Associates Inc., said he hasn't seen any evidence of companies using pension surpluses for severance. In fact, he added, the Employee Retirement Income Security Act tightly regulates how pension assets can be used.
"Any pension plan ... is guided by a plan document that says what can be paid out of the plan," Mr. Potter said. "I'm not a legal expert or a drafting expert, but I would think that would have to be built into the plan for people to do it."
Ted Disabato, managing director of Disabato Associates Inc., Chicago, said he has seen clients willing to amend employee vesting rules to immediately vest workers departing as part of a major downsizing who were close to becoming fully vested, allowing them to collect more retirement benefits.
Mr. Disabato said he didn't think using the surplus to pay severance is a good idea. "Those surpluses, when they do get built up, are meant to accommodate for times when markets underperform," he said. "Too often in this world we spend the surplus and then lament the deficits as though there's nothing we could have done about it."
Another issue is the Internal Revenue Service, which has not specifically endorsed the practice of paying severance out of pension assets, said Buck's Mr. Walter. In fact, an old IRS regulation says severance should not be paid from pension plans. But that can be worked around by listing severance as "supplemental pension credits," "transitional pension credits" or "shutdown benefits," he said.
Additionally, if a company's defined benefit plan is in the form of a cash balance plan, companies can merely add to an employee's cash balance account to pay severance.
"(Defined benefit) plans have developed (into) more of a lump-sum payment plan," Mr. Walter said, referring to cash balance and other hybrid plans. "Once you get used to lump sums, it's almost natural to start looking at other circumstances under which you might want to make a lump-sum payment. Severance is one of those."