The logo for Microsoft PowerPoint appeared briefly on a large screen on the wall, followed by the first slide. “This is the latest data we have on the UCBS employee pension fund,” she declared, stopping abruptly to imply that something dramatic was about to be said. “The first chart answers the first key question: How much money do we need to fulfill all these promises we’ve made to employees? The answer: $9.6 billion. This second graph answers the next key question: How much money do we actually have in the fund right now? Based on the value of the investments at yearend, the answer is $11.1 billion!”
As was often his style, Johnston played dumb to elicit a no-BS response. “Is that a large surplus?” he queried. “You’re not kidding it’s huge. It’s a whopping $1.5 billion more than we need. In other words, the employee pension fund is overfunded by $1.5 billion. Why? The stock market has been surging. The bond market has been going up. So the portfolio has been growing far more than projected. This is a gold mine. And it’s just sitting there, largely untapped.”
The CEO was genuinely puzzled. “I don’t get it. This $1.5 billion surplus you’re talking about is money that belongs to our employees. It’s money that’s held in a separate fund that has nothing whatsoever to do with our operations. How can we possibly transfer this money to our own accounts? You know darn well we’d never get away with that. People get thrown into jail for doing that kind of thing.” As his anxiety built up, the CEO’s forehead began twitching, as often happened when he was either mad or afraid.
“No, no, no. We’re not talking about actually raiding the pension funds. All we’re talking about here is moving some numbers around. What we’re going to do is get those huge unrealized profits in the pension fund—those paper gains—over to our books. Then we’re going to report them as profits to investors to make our statements look great, to get investors to bid up UCBS share prices.”
The younger man, mostly silent throughout the presentation, jumped in, raising his voice with marked enthusiasm. “Wow! Just wait till that number hits Wall Street! UCBS shares will go through the friggin’ roof!”
Johnston thought it was almost too good to be true. But it was happening everywhere in the real world. Indeed, in 2000 and 2001, some of America’s largest companies used the paper profits from their employee pension funds to dramatically beef up the profits they reported to shareholders.
Verizon Communications, for instance, had multi-billion-dollar losses in 2001. But just by adding in its projected pension fund gains exceeding $2 billion, the company was able to magically report a net profit for the year of $389 million.
Eastman Kodak lost tens of millions in 2001. But by including its projected $100-million-plus profit from its pension fund, the losses were magically transformed into a $76 million profit. Another company that lost tens of millions in 2001 was TRW. But by adding in a $100-million-plus projected gain in its pension fund, it transformed the huge loss into a $68 million profit. Honeywell International’s loss of $99 million in 2001 would have been several times greater. But the company counted the projected pension fund gain of hundreds of millions on the corporate bottom line. And there were many more.
Read More : The Great Pension Fund Maneuver
